Alberta teachers share the risk in defined benefit pension plan
Teachers in Alberta pay into their pension plan (Alberta Teachers’ Pension Plan) for their entire careers, and upon retirement receive a defined benefit pension that is based on a formula that takes a percentage of the highest five years of salary and multiplies it by years of service in the plan. This formula defines the pension benefits that a teacher receives at retirement and is independent of market changes. Knowing this, teachers don’t have to worry about the security of their teacher pension income when they retire.
This secure income comes at a cost, however, as teachers pay for this benefit during their teaching years. Teachers, approximately 40,000 of them, pay into their defined benefit pensions for their entire teaching careers. They share this cost with the government of Alberta, which pays the other half of the pension contribution. Government and teachers also share any risk, such as poor market returns and long-term low interest rates.
Defined contribution plans, on the other hand, leave all of the risk with the employee. Imagine being an employee with a defined contribution plan in which the employer and the employee each pay a defined amount into the employee’s pension. The employee is responsible for choosing the investment model from a series of choices offered by the financial institution in which his funds are invested. At the end of that employee’s career, he must hope that the markets have been good and that interest rates have improved.
An employee with a defined contribution pension who retired in late 2008 or early 2009 may have lost more than half of his individual pension account. This means that same employee would have had to return to work for a minimum of five years in an effort to recoup his losses (and enjoy five fewer years of retirement as well). Because the employer was required to contribute only a defined amount to the pension plan, he would not be responsible for any losses to the employee’s pension account, leaving the employee alone to absorb the entire risk and loss.
Defined benefit pensions are traditionally found in the public sector, which then makes these employees a target of pension envy. It’s the same old rhetoric, “If I can’t have them, neither should you” or “Your defined benefit pension costs taxpayers billions of dollars.”
With so many Canadians dealing with pension envy, we must find a way for more Canadians to have a pension other than the Canada Pension Plan. Although it is a very successful defined benefit plan, it replaces only a small portion of a retiree’s preretirement income.
In 2013 there were 6,184,990 Canadians in Registered Pension Plans (RPPs), an increase of 1.2 per cent from the previous year. Of those members, 71.5 per cent had defined benefit plans and 28.5 per cent had defined contribution or hybrid plans. The majority of those members with defined benefit plans (67.7 per cent) were employed in the public sector.
The fact that the number of Canadians enrolled in registered pension plans grew by 1.2 per cent in 2013 is good news for all Canadians. We must continue this trend so that all retired Canadians can live, not with envy, but rather with dignity and a pension that provides a comfortable living. ❚