Employer pension plans are a great way to save towards retirement. Different individuals may have varying retirement dreams. Regardless of whether you want to spend your retirement days exploring the world or just sitting home and enjoying time with family, it all comes down to one thing: fund your specific retirement goals.
Employers offer different types of pension plans to help towards achieving your retirement goals. Most organizations provide an opportunity for you to receive retirement income through three common types of pension plans. They are the defined benefit plan, the defined contribution plan, and group Registered Retirement Savings Plan (RRSP).
Under a defined benefit pension plan, your employer promises to pay you a defined amount of income when you retire based on how many years you work with them, your salary, and your retirement age. Usually, the retirement income from a defined benefit pension is determined by specific calculations and covers you for life. Your employer has the responsibility of making contributions and managing the investments in the pension fund. However, depending on the employer, you may also be able to make additional payments into the plan.
When an employer provides a defined contribution pension plan, they will make a defined contribution amount to your retirement plan. Most defined contribution pension plans allow you also to make voluntary contributions that your employer may match. With this type of plan, you can make investment decisions on the financial assets included in your retirement portfolio. The assets selected would reflect your risk tolerance and investment goals. You may also be able to rebalance your portfolio mix periodically as your financial situation changes. Under a defined contribution pension plan, the retirement income you receive is highly dependent on the total contributions that have been made into the plan and how well the investment assets in your plan have performed over the years.
Group RRSPs are very similar to a defined contribution pension plan. Both employers and employees are able to contribute to the account for retirement purposes. They operate just like a regular individual RRSP and provide the same tax benefits. Unlike the defined contribution pension plan, group RRSPs are not governed by the pension regulation and do not have the accompanying strict withdrawal restrictions. When leaving an employer, your contributions do not become locked-in, as would be the case for registered pension plans.
Other variations of employer retirement savings plans across provinces include the pooled registered pension plan (PRPP) and the voluntary retirement savings plan (VRSP) specific to Quebec. These plans provide an option for employees that are not part of a workplace pension.
While employers are not mandated to provide pension plans, when they do, they are required to comply with regulations set by the federal government and provincial guidelines on items such as applicable retirement age, vesting conditions, responsibilities of pension administrators and service providers, pension plan investments, eligibility for membership, amongst others.
There are applicable tax and pension laws that employer private plans have to comply with. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for overseeing federally regulated private pension plans to ensure that participating members and beneficiaries of pension plans are protected from actions of plan administrators that may result in loss of benefits.
The Pension Benefits Standards Act provides guidelines and regulations for employer pension plans that provide pension benefits to employees and former employees. This Act does not regulate profit-sharing plans such as the deferred profit-sharing plan (DPSP). The Income Tax Act oversees employer plans such as the DPSP and group RRSPs while pooled registered pension plans are regulated by the Pooled Registered Pension Plans Act.
If your employer offers a pension plan, it is recommended to participate as this may be beneficial in the following ways:
Employer-sponsored pension plans are a great way to save towards retirement. The type of retirement income you receive would depend on the type of pension plan provided. It is recommended to partake of retirement benefits provided by employers as they contribute to your total retirement income.
