Question. I’ve been working with the same employer for about 7 years, and I’m a member of the company pension plan. A few weeks ago I applied for a position at another firm, and was just recently offered the new job. It’s a significant increase in pay and seems like a great position, so I intend to move forward with the new job at the new company. However, I’m concerned about my pension at my current company. What happens to my pension when I leave?
Answer. First and foremost, congratulations on your new job offer! As for your pension, rest assured, the money is not lost. Before we get into the different options that are available when you leave a job with a pension, let’s first define a key term in the discussion of this topic: vesting.
Vesting. In most pension plans (i.e., contributory plans) both employer and employee contribute to the plan. The money that you contribute is yours no matter what – you can never lose this portion. However, vesting refers to when you are entitled to keep the amounts that your employer has contributed to your pension.
Note that pensions are either federally or provincially regulated – that means there are 11 different sets of rules, so the details regarding vesting are specific to the terms of the pension.
As of July 1, 2011, vesting is immediate for all federally regulated pension plans. That means you’re immediately entitled to any and all money your employer has contributed to your pension. Many other provinces are also following suit, as Manitoba, Quebec, Ontario, and Alberta have also implemented immediate pension vesting.
For any provincial jurisdictions that still have a vesting period, note that the vesting period is limited to a maximum of 2 years. In this scenario, if you were to leave your employer with less than 2 years of pensionable service (for example, if you left your job after 1 year), then you would forfeit the employer contributions to your pension plan, and you would not get to keep that portion. Again, the money that you have contributed is always yours, and you can never lose this part.
However, in your case, as you’ve already been with your employer for 7 years, and we assume you’ve been a member of your pension plan for the same timeframe, you will have satisfied the vesting period no matter where you live, and regardless of the jurisdiction of your pension plan.
Ok, so you’re entitled to all the money that you’ve ever contributed to the plan, as well as all the money that your employer has ever contributed on your behalf. But how do you get it?
Typically, when you leave a pension plan, you are presented with several options:
1. Reduced pension
Assuming you have not yet reached retirement age, it may still be possible for you to remain in the pension plan, although you would not be allowed to make any further contributions. Once you reach the age of eligibility (typically age 55) you can elect to begin receiving your pension. However, the amount you receive would be a reduced pension benefit, due to the fact that had only contributed to the plan for 7 years. If you are leaving a defined benefit (DB) pension plan, you should be notified in advance as to what this amount would be.
2. Pension transfer
In some cases, when you are leaving one job and starting another, it may be possible to transfer your pension to the new employer. If the new employer has a defined benefit (DB) pension plan, you may be able to transfer the value of your existing pension to a specified number of years of pensionable service in the new plan. Note that this is possible only if the new pension plan allows the transfer, and the transfer may not be result in the same number of years of service in your current plan. This is because some pension plans are more lucrative than others, and some have different contribution rates than others. Therefore, although you have accumulated 7 years of pensionable service in your current plan, that could translate to fewer (or more) years of service in the new plan.
3. Commuted value
The commuted value is a lump sum amount that your pension is currently worth. By electing this option, you receive a lump sum that must be invested in a special account such as a Locked In Retirement Account (LIRA) or Locked Retirement Savings Plan (LRSP) which are accounts that exist solely for this purpose – to accept transfers from pension plans. Investment options are the same as within an RRSP, however, some of the drawbacks to this approach is that there are specific rules regarding the withdrawal of funds from the account, and that you become responsible for the investment decisions and subsequent performance of the account.
Unfortunately, very few companies offer guidance and advice when leaving their pension plan. They would typically offer administrative advice – providing you with the necessary forms, telling you the date you must complete the forms, where to mail the completed forms, etc. – but no advice as to how to actually make the decision on which option is best for you.
That’s where we come in. This decision should not be taken lightly, as there are many variables to calculate and many factors to consider. If you have any other questions about pensions or retirement planning, or about any of our other products and services at ModernAdvisor, just ask us.