I work elsewhere now, what happens to my group pension?

There it is, the smell of a new worksite. It may be unfamiliar now, however it will soon be your new home. Life comes at you fast, you are on to the next project. Whether or not you chose to leave your previous employer is not of our concern. However, if you were a part of a group pension plan, you may be wondering: What happens to that money now? Do not fret as we have answers.

While you are busy gaining a foothold learning new coworkers names and the nuances of the workplace, we have the answer to what happens to your old group pension plan. How those assets come back into your hands is dependent on a few factors. To answer this question, I would like to highlight 3 factors:

1. Group Plan Structure

2. Vesting

3. Personal Plan considerations.

1. Group Plan Structure:

Let's begin with the group plan structure. The plan type will affect the eligibility of the plan to be transferred. I am going to highlight two of the most common group plans in Canada: Defined Contribution Pension Plans (DCPP) and Defined Benefit Pension Plans (DBPP). There are other potential structures we should be aware of such as: Defined Profit-Sharing Plans (DPSP), Group RRSPs and Pooled Registered Pension Plans (PRPP). For the sake of this post, we will focus on DCPP and DBPPs.

DCPPs are plans that take pre-tax dollars from employee paycheques and put them into an account administered by your employer. Then the company can match up to a certain percentage of contributions based on your pay. Employees know what they contribute to the plan; they will know how much their employer contributes as well. What the employee will not know, is the future value of the DCPP. This is dependent on contribution amount, returns, employee tenure and investment profile, among a host of other factors. The benefit to the employee is consistent contributions of pre-tax dollars into a Registered Pension Plan with the aim to improve retirement outlook. Let’s look now at DBPPs.

Defined Benefit Pension Plan (DBPP). This is a plan where employee service has a formula for an eventual pension benefit. This benefit is distributed as an annuity with the employee, upon retirement, as the beneficiary. This means the retiree will receive payments from the annuity over a period of time; the payment is a known, consistent amount based on chosen annuity associated with your DBPP. DBPPs usually have a qualifying factor associated with employee years of service, and an agreed upon standard retirement age. We will not dive into the formula in this article for the sake of clarity.

In general, the longer you work, the larger the annuity benefit upon retirement. It should be known, DBPPs can be transferred for their commuted value to individual accounts upon retirement or termination (certain rules apply based on individual DBPP). This commuted value will have a taxable portion of contributions above the excess tax-sheltered amount. Now these are options for a DBPP when the employee leaves their current employer. These are general notes, and each scenario should be looked at individually to ensure any decision made by the client is proper for their financial plan.

Both pensions provide employees an incentive to gain tenure and provide quality work. As we have discussed, the structure of both DCPP and DBPPs are different. Options for moving them from a group pension plan to a personal plan vary. However, it is likely that they will need to be transferred into another personal registered retirement plan via an RRSP or RRIF (Registered Retirement Income Fund). Depending on the scenario, an excess portion will be taxable in the clients’ hands. For any specific inquiry, I advise an in person discussion.

2. Vesting

First time hearing vesting? This term in our case refers to: the time at which company contributions become your rightful property. For example, if a company has a 3 year vesting period, it is the first date 3 years after the employees enrollment in the plan, that company contributions are considered employee property. This is important for tax implications and potential transfers of assets if they are transferring into an individual account.

In general, if the employee has not yet achieved the vesting period, the corporation will take its assets that it contributed, plus applicable growth/loss back. This provides an incentive to employees to gain tenure and loyalty to the company. Employees should not fret if they switch employers before this time. Employee contributions and growth are still personal assets and can be moved accordingly. Understanding vesting rules for the group plan helps us understand what claims the employee has on assets.

3. Personal Plan Considerations

With both DCPPs and DBPPs, they are registered accounts. This means the employee will likely get a tax benefit for participating in these plans. Often in the form of a 'pension adjustment' on the employees tax return. This also means we need to be aware of potential tax implications when we do move these plans from the corporately administered account, to a personal account.

Furthermore, the structure of the group plan may give the employee options to how they receive your retirement income. Specific to the DBPP, because it is based on a factor for salary and years of service, an annuity will be implemented upon retirement. This would provide a set amount of income over a set period of time. Of course, specific details like survivor rights, retirement date and retirement tax status, will affect the annuity’s final payment. These rules are set by the pension administrator and should be reviewed with the help of a professional.

Other factors specific to the individual must be considered: Are there other savings associated with registered accounts or non-registered accounts? When will the employee retire? How much does the employee project needing in retirement? All these questions can be answered with a full financial review with us. Moving assets from the account without these considerations may open gaps elsewhere in the financial plan. We must account for the entirety of the plan to ensure proper transfers if applicable.

So... what happens?

In summary, how your hard-earned money that ended up in the group plan is known. How to get it back to you is another ball game. The factors above are a few of the things to keep in mind when considering moving your group assets into an individual account. The structure of the plan helps us ensure we understand our options for transfers. The vesting period is important to understand when corporate contributions become personal property. Finally, personal plan considerations ensure we are maximizing the chosen option that fits with the full picture of the Financial Plan.