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Not everyone will embrace defined contribution, but it\u2019s an opportunity to create your own wealth. (Credit: Marvin Samuel Tolentino Pineda\/Getty Images) <\/p>\n Not everyone will embrace defined contribution, but it\u2019s an opportunity to create your own wealth. (Credit: Marvin Samuel Tolentino Pineda\/Getty Images) <\/p>\n
Tell a 60-year-old Canadian with a $4,200 per month defined benefit pension<\/a> that they are sitting on an asset worth close to $1 million, and they might shrug it off as an abstraction.<\/p>\n Offer that same person that lump sum up front, and it\u2019s a different story, says Jeremy Phillips, president and chief executive of Regina-based Plannera Pension and Benefits, which administers Saskatchewan\u2019s Public Employees Pension Plan, the largest defined contribution (DC) plan<\/a> in Canada.<\/p>\n \u201cI heard someone say one time when they were offering their plan members (the opportunity) to take the cash balance \u2026 90 per cent chose the money and would rather manage it for themselves,\u201d he said of the popularity of commuting, or taking a pension\u2019s value up front.<\/p>\n Defined-benefit (DB) plans<\/a> have become revered as gold-plated pension perks, something reserved for the likes of public servants and a shrinking number of lucky private sector workers. But as stock market returns have soared in recent years, DC pensions have been staging a comeback<\/a>.<\/p>\n Phillips said that when you start out with no money a defined benefit plan looks great for its security and predictability. But once balances start to grow, he finds that his members love defined-contribution plans and would be loathe to change.<\/p>\n Frothy stock markets will do that. The S&P\/TSX composite index rose 28 per cent last year and is up almost nine per cent year to date. The performance of major public pension plans, which pursue more conservative asset mixes, is nowhere near these gains.<\/p>\n While most DB plans today are in the public sector, Phillips said it\u2019s an interesting question as to whether the rest of the country, with employer matches, might prefer a DC plan.<\/p>\n Ana Nunes, an actuary and investment professional, said a rule of thumb is that a pension taken at 60 can be worth 18 to 20 times the monthly amount you will get for life, so for $50,000, those payments indexed or partially indexed to inflation could be worth $1 million today.<\/p>\n \u201cThe DB plans tend to favour people who stay in their jobs for a long time,\u201d Nunes said, adding that people like them because \u201cyou really don\u2019t have to lift a finger.\u201d<\/p>\n Phillips noted that DC plans are evolving, and can offer structures that recreate aspects of that security, such as through Variable Payment Life Annuities (VPLAs), which create at DB-like structure within a DC plan and can ensure retirees don\u2019t outlive their savings.<\/p>\n \u201cWe will give you a pension for the rest of your life and guarantee you don\u2019t run out of money,\u201d said Phillips.<\/p>\n Bernadette Chik, the leader of the defined contribution advisory business<\/a> at Mercer Canada, a business of Marsh & McLennan Cos. Inc., said a top concern for employees remains covering monthly expenses.<\/p>\n Story Continues <\/p>\n \u201cThe construction of investments has changed, and they are increasingly including alternatives in their asset mix,\u201d said Chik, about defined benefits, adding that exposure to investments such asprivate markets is allowing participants to retire earlier by achieving higher returns.<\/p>\n She said VPLAs are just starting to emerge, with Quebec finalizing legislation allowing them. Ontario is looking at the same thing.<\/p>\n \u201cBasically, they allow for longevity pooling within a DC plan and to convert a portion of savings into a stable income,\u201d she said, adding that the key difference is that the outcome is still not a promised benefit like a defined benefit.<\/p>\n Nunes, a fellow and director of the Canadian Institute of Actuaries, said the while the predictability of DB plans drives demand, the features matter, with a key issue being whether payments are indexed to inflation.<\/p>\n \u201cA good time to be in a defined benefit plan was when interest rates were low, and markets were not performing well. Think about the text bust in 2000 or 2001,\u201d said Nunes, noting those people managing their own money lost a massive chunk of their retirement overnight. \u201cHistorically, when there is a big correction, things recover. But if you were at a point in time where you wanted to retire, your plans got kiboshed. You have to withstand some ups and downs.\u201d<\/p>\n In the 1990s, she noted employees \u201cput up their hands\u201d for defined contribution because they didn\u2019t want to be in defined benefits plans where the employer kept the money if the plan was overfunded.<\/p>\n Typically, defined contribution plans offer less generous employer matches. Nunes said in a government-operated defined benefit plan, the employer might be putting in something equal to eight per cent or nine per cent of pay to match the employee contributions. Defined contributions are more typical at five per cent match, said Nunes.<\/p>\n \u201cThe value of your defined benefit could be worth more than your house,\u201d said Nunes, adding a caveat of those plans is how much can be transferred to a spouse if you die early. \u201cOther people argue I would rather have my (retirement account) where I can see $1 million and leave it to my spouse or children.\u201d<\/p>\n