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What You Need to Know about Your Canadian Defined Benefit Pension!

Updated: Apr 19

What do you know about your pension?



Last November during Financial Literacy month, I set about trying to sit down and finally learn about my pension through LAPP (Local Authorities Pension Plan).

Here is the link to the video that I made last year:



It contains short highlights of important information to know about your Pension Plan and navigates you through the website.


Did you know?

-LAPP has 275,000 members

-assets greater than $50 Billion

-in March 2019 two new boards were created as the sole stakeholders: the Sponsor Board and the Corporate board. Instead of the Alberta Finance minister being in charge, it's supposedly the pension plan holder, who is the new stakeholder. Some of the members of the Sponsor and Corporate board include union representatives from UNA, AUPE, CUPE, AFL and AHS. We as RNs, even have Heather Smith (president of UNA) representing us on the Sponsor board.


However, the main investment corporation in charge of the investments and funds is AIMCO (Alberta Investment Management Corporation) which is a crown corporation so we are not entirely separated from the Alberta government.


Do you know the difference between a Defined Benefit Pension Plan and a Defined Contribution Pension Plan?

There are two main types of Pension plans available in Canada. A Defined Benefit Pension Plan or a Contribution Benefit Pension plan:


LAPP is a Defined Benefit Pension Plan which means that the amount paid to you each month once you retire, can be estimated in advance and is paid to you for the rest of your life.


There are benefits and drawbacks to having a Defined Benefit Pension plan.


The Benefits are:

-steady income during retirement

-when the cost of living goes up with inflation, so does your pension amount because it is indexed to inflation

-if you die, you can assign your spouse as the beneficiary of your pension plan, however this might be at a reduced rate of 2/3 of the current monthly amount

-there are a couple different options to the type of benefit you can receive when you retire, such as what type of spousal benefit you opt for:



or Single Lifetime retirement options:




-contributions are professionally managed and are deducated from your paycheque pre-tax, so you don't even notice that it is missing.

-employers match employee contribution amounts plus an additional 1% more than the employee

-guaranteed as much as possible, backed by the government

-the liability is shared with many other contributors and the monies are pooled together for the potential to create greater wealth

-can help you save money towards your future that you might not have been able to do on your own.


Cons:

-limited decisions about what type of investments are chosen.

For example: When AIMCO lost a large sum of money ($0.9 Billion dollars) on a risky volatility trading strategy.



-Limited decisions regarding the Management Expense Ratios and fees associated with the fund management.

For example: if combined Employee and Employer contributions are approximately $20,000 per member per year and the fees are approximately $1000 per member, are we really paying 5% in fees??



-you are pooled with other shareholders and at the discretion of the decisions made by the Board

-When both yourself and your spouse have passed away, the benefits are gone and not passed onto your estate

-if the Pension Plan goes bankrupt, so do all of your investments in the Pension Plan

-you are limited by the monthly amount and cannot take greater lump sums of cash when you want it.


Summary

Everyone's individual situation is different because Personal Finance is Personal. If you are trying to decide whether to keep your Pension with LAPP or take the Commuted Value, please make sure that you do your research and speak to a fee only Financial Planner who can help walk you through the process and is not trying to sell you investments.


Did you know?

Pension members have the option to remove their money from LAPP and take the Commuted Value of their Pension Plan?

What is the Commuted Value? (CV)

It is the present value of the expected monthly lifetime retirement pension that they would have received from the plan.



How do they calculate the Commuted Value?

To calculate a CV payable from certain defined benefit pension plans, the interest rate assumption is determined monthly based on bond yields, historically using only Government of Canada bond yields. However, beginning December 1, 2020, the Standards of Practice have been updated with requirements for a more market-based calculation that also reflects yield information from provincial and corporate bond indices.

I recently stepped down from my part time position into a casual position and received a Termination statement from LAPP informing me of what my Commuted Value is of my current plan, should I chose to take the Commuted Value. To give you an example, my Commuted Value is approximately $135,000 with 10.5 years of service (in actuality, I have been a nurse for 16 years including 2 maternity leaves and have worked some part time years and some full time years). So if I multiplied that 10.5 years of service by approximately $20,000 per year in contributions, then I should have at least $210,000 in contributions without any interest earned in my contribution plan, not just $135,000, right?!



Check out this article about the changes to Commuted Values in 2020, which might be the reason my CV is lower than I expected.


Warning!

If you transfer your Commuted Value out of LAPP, then you are no longer eligible for a Lifetime LAPP Pension.

For all of the details regarding what happens when you take the Commuted Value including the tax implications and retirement implications, please read : https://www.lapp.ca/page/two-or-more-years-of-membership


Here is an interesting article by the Globe and Mail about whether you should keep your money in your pension plan or remove the money and take the Commuted Value.


Here is another article by the Royal Bank regarding the pros and cons of taking the Commuted value of your Pension.


Changes Coming in 2022!

In 2022, the minimum two year Vesting wait period will be waived and members of the pension plan will be immediately vested.



What does it mean to be Vested?




There is also change coming in 2022 to reduce the Contribution Rates for Employees and Employers.




Another major change, is how Commuted Values are calculated and dispensed.



Another Major Change is Contribution Interest Rates on your contributions:


I was a bit confused by this Interest rate change because both 0.9% and 4.4% seem rather low for investment returns even if this is based on stocks, bonds or a combination of both.


Another change is the Amending or Eliminating a Qualifying Disability Plan with LAPP, which may apply to some plan members.



And the final change, coming is: Voiding of Actuarial Reserve Purchases which has to do with Buyback purchases of your pension plan during leave of absences.



I did not include many of the details of these changes, because this would become really long and boring. Instead, I want to encourage you to contact LAPP yourself, if any of these changes potentially apply to you so that you can further discuss with a representative how these changes will personally impact your pension.


Now Go and Be Intentional about researching your Pension Plan!😊


Check out an updated blogpost about Can I Work Part Time and Retire with a Full Pension!

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