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Dale Jackson

Your Personal Investor


General Motors was first, and Fiat Chrysler and Ford Motor Company and are next. Pattern bargaining is set to take unionized workers in Canada at Detroit's Big Three automakers from the security of defined benefit pensions to the uncertainty of defined contribution pensions.  

The pattern goes well beyond the auto industry. Pension reform was a core issue during the recent Canada Post negotiations and it has been happening since the 2008 global financial meltdown sounded alarm bells over ballooning company pension costs. 

The transition can be frightening for anyone leaving the security of a defined benefit plan that pays a fixed amount until death, to a defined contribution plan that banks up money which must be budgeted to last a lifetime. Here's what you need to know about both plans:

Defined Benefit Pension

  • Your employer promises to pay you a certain amount after you retire – a flat benefit or a percentage of your salary at retirement.
  • The amount usually depends on the number of years worked and your income. Some add the cost of living increases.
  • The pension fund is held “in trust” by a financial institution that looks after how the money is invested.
  • The funding risks are carried by the employer.  

Defined Contribution Pension

  • The employer contributes a certain amount to your pension account each year based on your work income – usually between 3 per cent and 6 per cent. Employees often have the option to contribute and the employer will match that contribution in some way.
  • Each employee has their own separate pension account administered by a third party. 
  • Plan members can usually choose from a small, diversified selection of mutual funds or exchange traded funds (ETFs). Fees are usually low because they are bought in bulk.
  • How much you accumulate in retirement depends on how much is contributed and how well your investments do on the market. In addition to market risk, the plan holder assumes the risk of inflation or outliving their money.
  • On the bright side, the money is yours – no strings attached. If the company should go bankrupt or get into trouble, it’s still your account and your money.
  • If you move on to another job, your pension goes with you.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI