OPTrust Select is a new Defined Benefit Pension offering from OPSEU Pension Plan to Ontario workers in the not-for-profit sector.
3% contribution from both plan members & employer (6% total)
Annual benefit accrual rate of 0.6%;
(final benefit = 0.6% of average earnings x years of service)
Benefit upgrades are dependent on plans funding status
How does this plan compare to a 6% Cash Accumulation plan?
It’s all about guarantees. The benefit of OPTrust plan is by its nature, guaranteed. It is a Defined Benefit Pension plan where the benefit is defined. Under normal DB conditions the unknown is the cost of providing the benefit accrual. This cost is a function of the demographics of the group & the cost of buying the pensions at any given point in time.
In my 40-year pension career, I have not set-up one new Defined Benefit Pension plan. I have been involved in 9 or 10 wind-ups. I realize that in today’s environment the risk associated with funding this type of plan appears moderate & manageable. I’m sure the same was true of the plans that were set-up 40 – 50 years ago.
Once an organization joins this type of plan what is involved in getting out? These pensions are guaranteed & so is the pension promise. By their nature, Defined Benefit Pension plans favour older plan members where the cost of buying $1 of pension is higher.
Our analysis suggests that there is a significant advantage to employees under age 50 to take the risks associated with a DC Pension plan. The income replacement rate for a 30 year old who retires at age 65 is almost double that of the OPTrust Select plan.
After age 50 it’s relatively cost neutral, so there is no advantage to older staff which is somewhat surprising.
The other inherent issue with the DB plan is it’s not easily understood by plan members. Their benefit statements will show their benefit accrual and not their cash accumulation as the actual contributions are not set-up in an account under their name.
Benefits paid at death and termination of employment will reflect the value of their benefit accrual. This is tough for the average person to comprehend.
So why might you consider the OPTrust Select plan?
For it’s simplicity;
Employees no longer need to worry about investments
Employers don’t need to worry (as much) about plan
governance and educating plan members
There won’t be a need for Pension Advisors, but you will need to understand it & communicate it to your employees
Remember, your employees are important, and so is their Pension. Make sure to get advice you can trust from an experienced Advisor.
At Farrow Pension & Benefits, we strive to make a difference in the lives of your employees and their retirement plans by making it easier for them to understand and take action. We would be happy to hear from you, e-mail us at firstname.lastname@example.org
Over his 40 year career, Wayne has worked with hundreds of Canadian corporations to design and manage Retirement Savings Programs involving thousands of plan members.
His hands-on approach and involvement at the Plan Member level gives him a unique ability to see things through the eyes of all the stakeholders and most importantly, the Plan Member.
He has literally been there, and done that, on the shop floor, and the 52nd floor.
This experience has allowed him to simplify the plan design and management of retirement programs in such a way that the most important elements are clearly understood by both the Plan Sponsor, and the Plan Member.
As he always says, “if you can’t explain it to an eight year old, then you don’t understand it.”
You can contact Wayne at: email@example.com