Defined benefit workplace pension plans are the main factor separating seniors with financial security from those in poverty, and many CUPE members still do not have access to such plans.
From a resolution passed at CUPE National Convention, October, 1997
Only the ability to negotiate will ensure CUPE members a real say in the gains we want to see in our occupational pensions. As part of our collective bargaining program in the 1990s, CUPE will press hard to achieve the right to negotiate pensions for all our members.
From “Pensions: Securing Our Members’ Futures,” CUPE National Policy Statement, 1989
The Defined Benefit Plan - CUPE Members’ Best Option
Your workplace pension is your retirement wage. As the CUPE Policy statement quoted above points out, it is through negotiating our pensions that our aims will be met - financial security for our deferred wages, and meaningful control over the administration of our pension plans. In the past, CUPE has had real success in achieving these objectives by wherever possible insisting on a defined benefit type of pension plan, where we know - and negotiate - the terms of our pension and can be confident that our eventual retirement wage will properly and equitably reflect our years of service and our earnings.
The formula used for “defining” the benefit paid can be negotiated during collective bargaining. Workers and plan members can fairly negotiate an approximate level of retirement wage based on the projections of actuaries - the professionals whose job it is to estimate the cost of providing a certain level of pension.
For these reasons, defined benefit plans have been the choice of most workers, especially union members. Statistics Canada reports that over 88% of pension plan members belong to defined benefit plans, and this figure climbs to 95% when looking at public sector workers. The overwhelming majority of pension plan members participate in defined benefit plans. On the other hand, nearly 90% of money purchase plans had less than 100 members, which reflects the fact that they have been the secondary pension option for small employers that are unwilling or unable to take on a defined benefit plan.
More recently, along with some of the other potential challenges that come with mergers and amalgamations, many employers are attacking our defined benefit plans, and proposing less secure, inferior alternatives in the form of money purchase plans (or worse yet, group RRSPs or nothing at all!). In money purchase plans, employers and employees contribute at a certain level (a percentage of earnings), with these contributions to be invested during an employee’s work life.
The total amount of money accumulated in an individual’s account will be used to “purchase” a monthly retirement income (e.g. an annuity). No one knows what this monthly income will be, and in fact, the cost of annuities fluctuates dramatically each year with changes in interest rates, inflation rates, etc. In other words, with a money purchase plan, the employer is only committed to a predetermined contribution level, and will not guarantee any particular level of retirement wage.
The specific defined benefit pension options available vary depending on your province and workplace and will require review with the assistance of your CUPE National Staff Representative. The following chart has been prepared to explain some of the most important differences between defined benefit and money purchase type pension plans.
| COLLECTIVE BARGAINING | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| Subject to pension legislation, terms and conditions (contributions, pension wage, inflation protection, disability payments, early retirement etc.) are negotiable | Subject to pension legislation, contributions and some conditions of investment (ethical investments, investment options) are negotiable. |
| CONTRIBUTIONS | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| Plan members and employers contribute to the pension plan according to the terms set out in the plan. | Plan members and employers contribute to the pension plan according to the terms set out in the plan. |
| BENEFITS | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| All plan members are guaranteed a pension wage defined by the same formula. Retirement wage is based on earnings (e.g. best five years average) multiplied by years of service. The formulas vary from plan to plan. | Retirement income is based on the amount of money each plan member has in their individual account. This will vary according to the amount contributed, investment return and the cost of purchasing a monthly retirement income. |
| RISK | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| In a defined benefit plan, the objective is to provide the funding required for a pre-determined level of pension. The employer has an ongoing obligation to its contributions, and the costs can be spread over time. The risk associated with this type of plan is shared between the employer and the plan members collectively, and spread over time. | Because the employer has no obligation to fund any particular level of pension benefit, the employee is left to face the risks associated with retirement alone. This places much greater importance on the size of your account. The poorer your investment performance is, the lower will be your eventual pension. This risk is compounded by the risk of retiring “at the wrong time”, i.e. when purchasing your monthly retirement income is more expensive. The fluctuation in these costs can be dramatic - in 1989, $50,000 from a money purchase pension account could buy a $506/month life annuity for a single woman. Ten years later, in January 1998, the same $50,000 would buy you only $334/month - a drop of 34%! The employer is under no obligation to help money purchase plan members face this very real risk. |
| ADDITIONAL BENEFITS | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| Defined benefit plans can provide for a number of benefits in addition to basic pension wage including: enhanced early retirement benefits, survivor benefits beyond those required by legislation, portability (the ability to move your pension from one employer to another), disability benefits and inflation protection (see below). | Money purchase plans can provide benefits in addition to retirement income. These additional benefits must be purchased by each individual at the time of retirement and will significantly reduce the monthly income available to retirees. CANNEX Financial Exchanges Ltd’s best annuity rate for 1998 shows that a retiring plan member must take an 8% cut in their monthly payment just to make it a “joint life” annuity, payable to her or his spouse. |
| INFLATION PROTECTION | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| Many defined benefit plans provide for increases in income which provide at least partial protection against inflation. This is very important as over a retirement career of 20 years the losses to inflation can be devastating.Even where the plan does not provide for inflation protection, pension plan surplus is frequently used to provide increases to retirees on an ad hoc | Most retirement annuities deriving from money purchase plans provide for a set monthly income and are not protected from erosion by inflation. It is possible to buy a retirement annuity that provides for annual increases in monthly retirement benefits, but the cost is very high resulting in major reductions to the initial monthly income provided. Inflation protection is very expensive: a modest 4% annual increase in your monthly payment reduces your initial pension by more than 27%. |
| PLAN ADMINISTRATION | |
| Defined Benefit Pension Plan | Money Purchase Pension Plan |
| Many of CUPE’s larger defined benefit plans are jointly trusteed (with 50/50 representation) by employers and participating unions. This is the best way to ensure that plan members in your local union are fully represented for important issues concerning investment of pension funds, use of surplus and improved benefits for plan membership. Even in plans which are not jointly trusteed, unions are often actively represented on advisory committees responsible for recommendations concerning plan administration.These structures for “governing” defined benefit plans also allow collective decisions to be made for improving items such as funding improved early retirement options, which in turn may prevent layoffs or increase opportunity for younger plan members | As money purchase plan benefits are managed as individual accounts, plan members have no say in the management of the plan as a whole. Individual plan members may have investment options for portions of their retirement savings. Employers usually prefer money purchase plans because they are easier to administer and their costs and liabilities are strictly limited. |
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