If you decide to extend your career beyond age 65, how will this affect your defined benefit plan?
That’s the interesting question raised by Louis’ situation. The 67 year old, 8 months old, works part-time in a multinational company. He plans to retire next year.
Our reader benefits from a generous pension plan from his employer, but says he’s disappointed with his “pension fund’s” treatment of older workers.
What is the problem ?
The best unrecognized years
Louis was unpleasantly surprised to find this phrase in his plan documentation: “In accordance with Quebec law and the terms of the plan, your credited years of service and average of your most recent salaries used to calculate your pension will be at your normal retirement age frozen.
The problem is that from a compensation perspective, Louis had his prime after passing the normal retirement age at 65. If these were factored in, he estimates his pension would be $150 a month higher.
Is this, as our reader believes, the Legislature of Quebec? Is he entitled to recognition of his last years of service?
“Given the labor shortage, it seems to me that we should encourage employees to stay in the job longer,” argues Louis.
This falls within the scope of the Quebec Supplemental Pension Plans Act. According to actuary and financial planner Mélanie Beauvais of the law firm Bachand Lafleur, the pension plan, which stops at age 65, is permissible.
“The law does not require employers and employees to contribute to the plan beyond that age,” she explains.
The good news is that our reader hasn’t had to pay into the fund for three years. Normally, it should appear on the payslip as well as on the RRSP contribution space, which is no longer limited by the pension adjustment resulting from participation in the retirement plan.
If Louis had contributed to that in recent years, that would be a different story, but Mélanie Beauvais doubts it. An appeal is therefore not possible.
However, because Louis delayed paying his benefits by three years, Quebec law requires the plan to reassess the pension. It is the same principle as with the QPP, the pension is adjusted upwards.
Less, less generous
Our future retiree is one of the privileged. A minority of employees have access to a defined benefit pension plan that guarantees a pension until death. Only governments and a few large corporations still offer it to their employees.
They’re expensive, and the promise of a lifetime pension puts the financial risk on employers, who must bail out the fund in the event of a deficit.
That is why the number of such regimes has steadily declined for a quarter of a century, and those who have resisted are often less generous than they used to be.
So far, the option of retiring before the age of 65 has remained attractive. After a certain number of years of service, an employee could leave the company early without significant losses.
Mélanie Beauvais explains that a hasty exit has a greater impact on pension levels, at least in the private sector. There’s nothing stopping you, but the impact on retirement income is daunting.
The goal is to lower the cost of the plans, but these changes also have the effect of encouraging more workers to stay on until age 65.
After all, it’s the stick. Reader Louis would prefer the carrot.