Defined Benefit Pension Question
I have a friend looking to change employers. She has been with one company for 13 years and has been in the defined benefit pension plan since she started. She is considering a new position with a company that will also provide her with a defined benefit pension.
If she changes employers, will she effectively be in the same boat pension wise when she retires in 23 years (she is 42)?
She will have the option of receiving a pension from her current employer when she reaches 65 based on the accrued value of the pension she has accumulated. Or she can port the current value of the pension to a registered plan (like an RRSP), although we can ignore this option for now. Not sure if she can move it to her new employer? Is that often the case?
Will the accrued pension of 13 years from her existing employer, plus the pension she will accrue with the new employer for 23 years be equal to the pension she would receive if she stayed with the current employer for a total of 36 years? If not, how do you figure out the overall lost benefit of changing employers? Thanks.
If she changes employers, will she effectively be in the same boat pension wise when she retires in 23 years (she is 42)?
She will have the option of receiving a pension from her current employer when she reaches 65 based on the accrued value of the pension she has accumulated. Or she can port the current value of the pension to a registered plan (like an RRSP), although we can ignore this option for now. Not sure if she can move it to her new employer? Is that often the case?
Will the accrued pension of 13 years from her existing employer, plus the pension she will accrue with the new employer for 23 years be equal to the pension she would receive if she stayed with the current employer for a total of 36 years? If not, how do you figure out the overall lost benefit of changing employers? Thanks.
Comments
As to the rest of your question, I have no idea . . .
If however there is a possibility the company could go bankrupt then she would be better off having the commuted value of the pension ported into a LIRA (locked in retirement account) and managing the money herself, especially if her years of service are fairly low. The real value of a db pension comes at the back end with 20+ years of service in. Pensions in Ontario are somewhat guaranteed by the government but just talk to former Nortel employee.
It also depends on the formula her employer is using to calculate benefits. Usually it would be 2%/year of employment. As long as her new employer also uses a DB pension and the same formula then her total pension would remain the same. However it also depends on factors like relative pay scales and early retirement benefits. For example if one employer uses an 85 factor to calculate early retirement (age+years service) then by switching the years service will reset to zero and she will lose the opportunity for early retirement under that formula. Also the pension would usually be based on the best five years of service and if she had recently had a promotion/change of pay scale then the effect of that change would take 5 years to filter down and it might be of benefit to wait until that time has passed.
Usually DB plans can not be transferred from one employer to the next, especially in the private sector. In the public sector it is more common, one example is the Nurses pension plan (HOOPP) can be transferred to the Ontario colleges plan (CAAT). In this case the years of service for early retirement would also transfer over and continue incrementing.
I don't think they would remain the same with a 2% accrual style pension. For example, if you earn $50k a year and the formula is 2%/year of employment, after your first year you have not accrued a pension of $1000/year or $83/month at 65. It would be a lot less. If that was the case, I can see where there would be no difference. She would have accumulated 26% with her current employer and could accumulate the remainder at the new employer (assume unchanged salary). If she stays with her current employer for the full 35 years, she will get a pension based on 70% of her current salary. But if she changes employers, the aggregate of the two pensions I think will be different.
2% x Best 5 yr ave x pensionable service
Whether it is
2% x 50000 x 15 + 2% x 50000 x 20
or
2% x 50000 x 35
the total remains the same.
Where she will lose money is in the salary increases because
2% x 50000 x 15 + 2% x 80000 x 20
is not the same as
2% x 80000 x 35