DB to DB Transfer (HOOPP/OMERS)

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DB to DB Transfer (HOOPP/OMERS)

Post by Pension12345 »

Hi Everyone,

Background: 30 years old, 5 year member of HOOPP and just went into OMERS.

Changing jobs after 5 years has given me 3 options with the HOOPP pension I was enrolled in:

1) leave it as is and collect a HOOPP defined pension based on 5 years of service when I retire.
2) Transfer the funds and years of service to OMERS, which would give me 5 years of service equivalent in their pension
3) Take a lump sum payout and put it into a retirement account that I manage personally

The hospital pension plan (HOOPP) almost sounded aggressive on the phone. "You will stand to lose $10-20K right out of your pocket if you transfer to another defined pension rather than take the lump sum we're offering you".

Right now both pensions are talking to each other about the value to be transferred (this takes about 8 weeks and a bit of back and forth). This is the likely scenario (exact numbers are not known at this point so I've thrown some in):

OMERS Pension to HOOPP: "this employee works here now and has requested a transfer of pension/service. we have evaluated that to be $86,000. Give us that and he will have 5 years of status in our pension."

Hospital Pension (HOOPP): "Ok, but we have $110,000 available in his account to hand over."

OMERS Pension: "Give us the $86,000 because that's the maximum we can accept; we only care about getting him up to that 5 years of service under our pension."

This is where it gets interesting. The Hospital Pension says sure, transfers the lower dollar amount and then tells me they keep the access. That's invested money that has come directly out of my paycheque for 5 years with employer contributions and interest. I don't understand how that can be legal. They should have to not only pay OMERS the transfer value they want, but park the surplus in an RRSP for me, no?

On the other hand should I even care? Should I be placing more emphasis on just making sure I get credit for 5 years of service in OMERS?
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Peculiar_Investor »

Welcome to the FWF community.

There are a few members here who have expertise in the pension area and hopefully they'll be around soon to provide some input.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by adrian2 »

#1 You have been lucky to have a membership in a DB pension plan in the last 5 years.
#2 You are lucky to have a membership in a DB pension plan going forward.
#3 You are lucky that the new DB pension plan accepts credits from the previous plan on a 1-to-1 basis.
#4 You are lucky that the new DB pension plan asks for less than what the old plan is willing to offer.

Now back to basics. The logical assumption is that you want to make use of the good fortune you have and stay in the DB pension plan for a long time, likely until you retire.
A defined benefit plan defines the benefit (pension). You should not care too much about interim evaluations, which are fraught with making actuarial guesses.
This is where it gets interesting. The Hospital Pension says sure, transfers the lower dollar amount and then tells me they keep the access. That's invested money that has come directly out of my paycheque for 5 years with employer contributions and interest. I don't understand how that can be legal. They should have to not only pay OMERS the transfer value they want, but park the surplus in an RRSP for me, no?
There is no "surplus", it's a different set of actuarial guesses. HOOPP actuaries are less optimistic overall than the OMERS actuaries, and they think it will cost them more to keep the promise of paying you $x in retirement. It's not as if the contributions from you and your previous employer have grown to a larger amount and they are "stealing" it from you; there is no separate pot of money marked as yours.
As long as the promise made to you by HOOPP is the same as the promise made to you by OMERS, it should not matter how much they pay each other for that promise. The two actuarial valuations are not part of that promise.

See #4 above.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by AltaRed »

:thumbsup: to Adrian's last paragraph. You only have to be concerned about the 'defined benefit' trems. The inner workings of these gov't civil service plans simply are not relevant to you. The plans worry about how much 'inner workings' cash goes between the plans.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

Not sure a person in his 30s is particularly "lucky" to have a DB pension. Someone in his 50s - very much so.

Younger people get screwed up by DB pensions in two significant ways:

1. High likelihood of quitting DB pension before maturity. This will penalize the holder.

2. The way they reduce RRSP room disadvantages younger people.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by brucecohen »

adrian2 wrote: 06 May 2017 09:24 There is no "surplus", it's a different set of actuarial guesses. HOOPP actuaries are less optimistic overall than the OMERS actuaries, and they think it will cost them more to keep the promise of paying you $x in retirement. It's not as if the contributions from you and your previous employer have grown to a larger amount and they are "stealing" it from you; there is no separate pot of money marked as yours.
As long as the promise made to you by HOOPP is the same as the promise made to you by OMERS, it should not matter how much they pay each other for that promise. The two actuarial valuations are not part of that promise.
:thumbsup: :thumbsup: +5
Actually the OMERS promise is a wee bit better because an OMERS pension is automatically fully indexed for inflation while a HOOPP pension is conditionally indexed based on the plan's health. That said, HOOPP has an excellent record of keeping up with inflation.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by brucecohen »

Mordko wrote: 06 May 2017 12:50 Not sure a person in his 30s is particularly "lucky" to have a DB pension. Someone in his 50s - very much so.
If both accrue the same service and have the same earnings base their pension will be equal. The difference is that DB funding for a person in his 30s is much lower because there's so much time for the money to grow until retirement day.
Younger people get screwed up by DB pensions in two significant ways:

1. High likelihood of quitting DB pension before maturity. This will penalize the holder.
That used to be the case but was remedied when the pension adjustment reversal was implemented.
2. The way they reduce RRSP room disadvantages younger people.
Not necessarily. Pension adjustments are too high for younger people and too low for older people because the system's architects averaged DB credit value over a full career.* This averaging offsets the claimed disadvantage if the younger person works a full career with the plan sponsor. That's not uncommon in the public sector where DB plans are now typically found. If he/she leaves early much, though not all, of the claimed disadvantage is covered by the PAR. In claiming any disadvantage, though, consider that the employer that sponsors a DB plan has to fund at least 50% of the cost of the pension. So the boss is typically putting out 7-9% of pay or more if the plan is in deficit. The mandatory employer contribution for a DC RPP is only 2% of pay. Employers used to typically pay 5% in a match with the employee's contribution but I've heard that many have since reduced that to 3%. Note too that the DB plan immunizes the younger person against market risk plus longevity risk and likely inflation risk if the person and plan are in the public sector. DC plans offer no such immunity. Also, members of DC RPPs and group RRSPs are limited to the investment options chosen by the sponsor. Depending on the sponsor's concern for its employees and the plan's size, those options might be better than those on the retail market but could also be worse.

* Depending on the plan, the PA teeter-totter tips somewhere between age 40 and 45. After the tip, the PA undervalues the DB credit accrued that year.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

Hmm... I received no PAR, having quit at 47. Apparently there are never any PARs with the pension scheme which I quit - at least thats what I was told by HR.

As far as I can judge (not being an expert), the key factor of success with DB pension is retiring from it rather than quitting. Salaries go up above the rate of inflation and DB only takes account of the final years when calculating the pension. People who are young are unlikely to be there till the end. The assumption then is that the funds will grow at the rate of inflation, which is less than what it would be if you invested AND if you magically received the expected final pre-retirement pay prior to quitting.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by GreatLaker »

Another factor is that the pension typically gets paid out at the average of the employees 5-year final average salary or something similar. So if the OP remains in HOOPP to take a deferred pension it will be paid out based on their average salary for the last 5 years in that plan. If they transfer to OMERs those pensionable earnings will get revalued each year up to their final salary when they leave or retire from the OMERs plan. Maybe Bruce Cohen could say if I understand that right.

For someone that stays their entire career in public service pension plans, ability to transfer plans when changing employers can be a huge advantage. I was in 2 private sector DB pensions and neither offered any indexing or ability to transfer to a new plan.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by cashinstinct »

Mordko wrote: 06 May 2017 15:39 the key factor of success with DB pension is retiring from it rather than quitting.
Considering current low interest rates, it can be advantageous to take the money when leaving, compared to taking the pension...

Depending on discipline / ability to invest in equities / etc...

DC plan might be good in theory, but in my limited experience, employers tend to invest less in contributions in DC plan (paltry 3-5%?), compared to what they might be forced to pay for DB plan (10%+ per year).
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by longinvest »

cashinstinct wrote: 07 May 2017 06:24 Considering current low interest rates, it can be advantageous to take the money when leaving, compared to taking the pension...
Five years of contributions represents a significantly higher lifelong inflation-indexed pension at age 65. Such a pension is the envy of many for a good reason. If it was me, I would transfer the money into the new DB plan and stay there for the rest of my working life.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by cashinstinct »

longinvest wrote: 07 May 2017 07:36
Five years of contributions represents a significantly higher lifelong inflation-indexed pension at age 65. Such a pension is the envy of many for a good reason. If it was me, I would transfer the money into the new DB plan and stay there for the rest of my working life.
I agree.
Simply saying that commuted value can end up being a high number.

It can end up awfully though
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

cashinstinct wrote: 07 May 2017 06:24
Mordko wrote: 06 May 2017 15:39 the key factor of success with DB pension is retiring from it rather than quitting.
Considering current low interest rates, it can be advantageous to take the money when leaving, compared to taking the pension...

Depending on discipline / ability to invest in equities / etc...

DC plan might be good in theory, but in my limited experience, employers tend to invest less in contributions in DC plan (paltry 3-5%?), compared to what they might be forced to pay for DB plan (10%+ per year).
The interest rate point is true. On the other side of the equation the Feds will be taking 53% of the non-LIRA portion of your pension, which can be up to 50% of all the funds.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

longinvest wrote: 07 May 2017 07:36
cashinstinct wrote: 07 May 2017 06:24 Considering current low interest rates, it can be advantageous to take the money when leaving, compared to taking the pension...
Five years of contributions represents a significantly higher lifelong inflation-indexed pension at age 65. Such a pension is the envy of many for a good reason. If it was me, I would transfer the money into the new DB plan and stay there for the rest of my working life.
Absolutely - anyone who is 55 or 60 should join a DB pension or stay in it, assuming your company isn't about to go bankrupt.

The equation is very different for someone who is 30.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by longinvest »

Mordko,
Mordko wrote: 07 May 2017 09:40
longinvest wrote: 07 May 2017 07:36 Five years of contributions represents a significantly higher lifelong inflation-indexed pension at age 65. Such a pension is the envy of many for a good reason. If it was me, I would transfer the money into the new DB plan and stay there for the rest of my working life.
Absolutely - anyone who is 55 or 60 should join a DB pension or stay in it, assuming your company isn't about to go bankrupt.

The equation is very different for someone who is 30.
One can't have it both ways. Someone joining a pension plan at age 55 will only have 10 years of contributions at age 65 and get a very small pension (10% of salary*). To get a full pension (70% of salary*), one usually needs to accumulate 35 years of service (pension accrues 2% per year for a maximum of 35 years). In other words, to get a full pension, one needs to join the pension plan before age 30! Incidentally, those joining before age 30 can usually retire with a full pension as soon as they reach 35 years of contribution.

* It's usually the average salary of the best 5 years, and there's usually CPP integration at age 65.

In the shoes of the OP, unless I had any plans to leave the public service any time soon, I would gladly transfer five years of contribution into OMERS.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

longinvest wrote: 07 May 2017 09:48 Mordko,
Mordko wrote: 07 May 2017 09:40
longinvest wrote: 07 May 2017 07:36 Five years of contributions represents a significantly higher lifelong inflation-indexed pension at age 65. Such a pension is the envy of many for a good reason. If it was me, I would transfer the money into the new DB plan and stay there for the rest of my working life.
Absolutely - anyone who is 55 or 60 should join a DB pension or stay in it, assuming your company isn't about to go bankrupt.

The equation is very different for someone who is 30.
One can't have it both ways. Someone joining a pension plan at age 55 will only have 10 years of contributions at age 65 and get a very small pension (10% of salary*).
10% of pre-retirement salary + benefits based on 10 years of service is nothing short of awesome. You are almost guaranteed to get back out of the system many times of what you paid in. One assumes you weren't sitting on your hands prior to joining the DB scheme.

For a 30 year old its very different. The chances of leaving the company prior to pensionable age are much higher. That will result in a massive tax hit based on the newly established 53% tax (followed by another tax on the same funds as you draw the pension). Not only that, young people suffer disproportionately from the loss of RRSP room because their funds have so much time to grow.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by longinvest »

Mordko,
Mordko wrote: 07 May 2017 10:26
longinvest wrote: 07 May 2017 09:48 Mordko,
Mordko wrote: 07 May 2017 09:40

Absolutely - anyone who is 55 or 60 should join a DB pension or stay in it, assuming your company isn't about to go bankrupt.

The equation is very different for someone who is 30.
One can't have it both ways. Someone joining a pension plan at age 55 will only have 10 years of contributions at age 65 and get a very small pension (10% of salary*).
10% of pre-retirement salary + benefits based on 10 years of service is nothing short of awesome. You are almost guaranteed to get back out of the system many times of what you paid in. One assumes you weren't sitting on your hands prior to joining the DB scheme.

For a 30 year old its very different. The chances of leaving the company prior to pensionable age are much higher. That will result in a massive tax hit based on the newly established 53% tax (followed by another tax on the same funds as you draw the pension). Not only that, young people suffer disproportionately from the loss of RRSP room because their funds have so much time to grow.
Let's just make sure that you're not comparing apples and oranges.

Do you mean that the OP could withdraw the funds onto a LIRA, and be taxed 53% on the excess, then invest the remaining funds until age 65 (while paying taxes on the non-registered portion*), and then be certain of being able to buy a joint inflation-indexed life annuity with the accumulated funds which will pay more than the difference in OMERS pension?

* Let's assume that the OP would have filled his RRSP and TFSA anyways, even if staying in the pension.

Please show us the maths.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

longinvest wrote: 07 May 2017 10:38 Mordko,
Mordko wrote: 07 May 2017 10:26
longinvest wrote: 07 May 2017 09:48 Mordko,



One can't have it both ways. Someone joining a pension plan at age 55 will only have 10 years of contributions at age 65 and get a very small pension (10% of salary*).
10% of pre-retirement salary + benefits based on 10 years of service is nothing short of awesome. You are almost guaranteed to get back out of the system many times of what you paid in. One assumes you weren't sitting on your hands prior to joining the DB scheme.

For a 30 year old its very different. The chances of leaving the company prior to pensionable age are much higher. That will result in a massive tax hit based on the newly established 53% tax (followed by another tax on the same funds as you draw the pension). Not only that, young people suffer disproportionately from the loss of RRSP room because their funds have so much time to grow.
Let's just make sure that you're not comparing apples and oranges.

Do you mean that the OP could withdraw the funds onto a LIRA, and be taxed 53% on the excess, then invest the remaining funds until age 65 (while paying taxes on the non-registered portion*), and then be certain of being able to buy a joint inflation-indexed life annuity with the accumulated funds which will pay more than the difference in OMERS pension?

* Let's assume that the OP would have filled his RRSP and TFSA anyways, even if staying in the pension.

Please show us the maths.
1. Nothing is certain when we are talking about the future. Two many unknowns with regards to OP:

- How will he invest if he pulls out?
- Will he change jobs in the next 30 years?
- At what rate will his salary increas?
- Will his employer change the scheme?
- What inflation are we to expect over the next 30 years?
- Will taxation change? Pension system?
- and by the way... How will the market perform?

He needs to build a decision tree and assign probabilities to make an informed probability-based choice.

2. While not certain, the probability of an older employee doing better in a DB is very high. Far lower for a 30-year old. DB discriminates against younger staff vs older staff.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by brucecohen »

Mordko wrote: 06 May 2017 15:39 Hmm... I received no PAR, having quit at 47. Apparently there are never any PARs with the pension scheme which I quit - at least thats what I was told by HR.
You use the term "pension scheme." Was it really a DB plan. If you left a DB RPP before 1997 there was no PAR. If you left after 1996 the only way in which there would have been no PAR was if your commuted value equaled the total of your pension adjustments since 1990.
As far as I can judge (not being an expert), the key factor of success with DB pension is retiring from it rather than quitting.
Yes, DB plans are rooted in a past age when career employment was common. While that's no longer the case in the private sector, it's still common in the public sector where the OP is employed and which remains dominated by DB plans.
People who are young are unlikely to be there till the end.
True in the private sector. Not so true in the public sector. Frankly, this aspect of your discussion is rather pointless as few private sector employers today even offer DB membership to new hires. Over the past 15-20 years the private sector trend has been to grandfather current staff in DB plans while directing new hires to DC. In some cases DB accruals for current staff have been frozen with future service covered by DC. By and large the only young/younger people entering DB plans today are public employees and those working in unionized old economy industries. In some cases, as a matter of equity, companies that are required to maintain DB plans for unionized workers still maintain them for non-union management and technical staff.
The assumption then is that the funds will grow at the rate of inflation, which is less than what it would be if you invested AND if you magically received the expected final pre-retirement pay prior to quitting.
I don't understand this statement. A person's DB pension reflects his/her wage growth which reflects both experience/skill/responsibilities and inflation. The two most common forms of DB plan are/were "final/best average" and "career average." The first, and best known, bases the pension on average income for the best 5 years or the final 5 years*. A career average plan accrues a pension equal to x% of each year's income, so here too the ultimate pension would reflect wage growth. Career average plans used to be fairly common among mid-sized companies and I would not be surprised if there are few left today. In the old days these plans customarily dealt with inflation by periodically adjusting the accrued income on an ad hoc basis. To the extent such plans still exist, I doubt that ad hoc bumps are common or even occur.

* While 5 years is the norm, the Income Tax Act does allow use of a 3-year average and that's a common fixture of executive level DB plans.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

brucecohen wrote: 07 May 2017 11:50
Mordko wrote: 06 May 2017 15:39 Hmm... I received no PAR, having quit at 47. Apparently there are never any PARs with the pension scheme which I quit - at least thats what I was told by HR.
You use the term "pension scheme." Was it really a DB plan. If you left a DB RPP before 1997 there was no PAR. If you left after 1996 the only way in which there would have been no PAR was if your commuted value equaled the total of your pension adjustments since 1990.
Yes it is a Defined Benefit Plan. A very generous one with lots of benefits. And a private company. And open to new young hires. I left in 2017 and was told that PAR will be calculated once the commuted value is transferred (that will take 5 years), however should expect "no PAR" because there has never been any for company staff leaving the pension. This was the "unionized old economy" case. While I wasn't in the union, the DB plan applied.

There is a ~100K tax hit, so the example isn't hypothetical or "pointless".
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

"I don't understand this statement".

I was referring to the scenario with an employee leaving the DB plan which would then be indexed to inflation. Obviously a young worker would lose out quite a bit because his final 5 years are bound to be associated with a salary that would be significantly higher than just original + the rate of inflation. Again, this isn't much of an issue for someone in his 50s.
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Re: DB to DB Transfer (HOOPP/OMERS)

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cashinstinct wrote: 07 May 2017 08:26 It can end up awfully though
https://www.google.ca/amp/www.cbc.ca/amp/1.3614880
I'd wager that more retirees have been hurt by taking the CV and managing it badly or handing it over to a predatory adviser that invested it in high-fee investments or other products like variable annuities than by failure of a DB pension through fraud or bankruptcy of a pension sponsor. That link illustrates why. That retiree did not realize that the LIRA was Locked-in. And he got a $260k cash payment then had to borrow to pay the tax on it. And bought a second house and 2 new vehicles.

I left a company that had very poor financials. A lot of people in the DB plan asked me if they should take the CV. I hate giving financial or investment advice in a situation like that. So I would ask a series of hard questions. How would you invest the funds? Have you invested that much money already? What portion of your retirement assets will this be? What would you do if the market crashed 40% like in 2008 or 2000? What are the fees in your proposed investments? Do you understand the impact of fees on long term returns? Etc. Most of them had not even thought about such things, never mind had answers. Hopefully I nudged them in the direction of a good decision.

brucecohen wrote: 07 May 2017 11:50 If you left a DB RPP before 1997 there was no PAR. If you left after 1996 the only way in which there would have been no PAR was if your commuted value equaled the total of your pension adjustments since 1990.
I was in a DB plan from 1995 to 2016, age 38 to 58. My CV was 2.25 times the total of all my PA during that time. I assume since CV > sum of PA no PAR is payable. My CV went up >50% in the final 3 years, driven in part by falling interest rates, and partly due to updates in actuarial lifespan used in calculating pensions.

Through a series of mergers, I was in a grandfathered DB plan, and the company also had a DC plan. I estimated what the present value of the DC plan would have been based on company contributions and rates of return (based on a balanced portfolio and numbers from Stingy Investor Asset Mixer). The CV was 3 or 4 times what the DC plan would have been worth.

I took the CV because of the company's dodgy ownership and financial position, but I have a hard time understanding why anyone in a well funded indexed public service pension would opt for the CV instead of monthly pension.

Once an employee in the OPTrust (OPSEU) pension reaches age 55 they can not take the CV.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by cashinstinct »

I would not trust most people with taking the commuted value, unless they invest by themselves already a significant portfolio, with low or almost no fees.

For people who know that they are doing (small portion of the population!!!), it's an option to consider.

Unfortunately, if someone asks financial advisor, the advisor has an obvious conflict of interest.

There are many variables to consider for sure, as said by other responses.
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by brucecohen »

Mordko wrote: 07 May 2017 12:12 Yes it is a Defined Benefit Plan. A very generous one with lots of benefits. And a private company. And open to new young hires. I left in 2017 and was told that PAR will be calculated once the commuted value is transferred (that will take 5 years), however should expect "no PAR" because there has never been any for company staff leaving the pension. This was the "unionized old economy" case. While I wasn't in the union, the DB plan applied.

There is a ~100K tax hit, so the example isn't hypothetical or "pointless".
We'd be able to understand your situation and complaint better if you identified the company. Depending on the jurisdiction, commuted value must be determined within 30-90 days of departure. While a plan in major deficit can delay actual payment, the CV must still be determined on a timely basis. The CV is the only new info required for the PAR since the company already has the total of PAs and PSPAs. CRA requires the employer to report the PAR on a T10 submitted to them and the employee within either 30 or 60 days (I forget) of the end of the quarter in which the employee left the plan. I suppose there might be special case complications if your former employer is tied up in bankruptcy proceedings, but nothing you've said jibes with my experience or what the rules say, at least for normal cases.

In any event, your comments are pointless for the OP since he/she is in the public sector. And arguably pointless for nearly all in the private sector since few, if any, companies give employees the option of not joining a DB plan. I knew of one many years ago, but I doubt that this option still exists.

As for the pros and cons of DB versus DC all we have to do is look at the experience of the US which embraced DC well before Canada, about 20 years I think. Here are links to a variety of articles in which the founders of the US DC concept -- 401k plans -- now call it a failure. In a nutshell: employers did not pay adequate contributions as is happening here, fees -- which are lower than here -- have been too high, individuals have not done of a good job of managing their money, and the 2007-08 crash hit just as the baby boom generation was reaching retirement.

Of course, discussing DB versus DC in today's environment is little more than an academic exercise. The private sector has abandoned DB and won't go back, at least not until career employment comes back in vogue. DB is entrenched in the public sector and likely unassailable as long as unions retain the ability to strike and fund investment managers in OTPP, OMERS, HOOPP etc continue to do well.
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Mordko
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Re: DB to DB Transfer (HOOPP/OMERS)

Post by Mordko »

I was given the Commuted Value, but not the PAR. Sounds like I was mislead on the timing of informing me what the PAR is going to be, so I will follow up - thanks.
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