If you contribute to a defined benefit pension plan such as the RREGOP (Government and Public Employees Retirement Plan), you benefit from one of the best forms of retirement savings in Québec. From pension calculations to pension adjustments and the differences between defined benefit and defined contribution plans, let's take a closer look so you can better plan your retirement.
What is a defined benefit pension plan?
A defined benefit pension plan is a promise of guaranteed income for your retirement. Unlike with defined contribution plans and RRSPs, where the final amount you receive depends on the market, with this type of plan, you know in advance how much you'll receive.
In practical terms, your employer commits to paying you a pension for life after you retire. The amount is calculated according to a formula that takes into account your years of service and the average salary of your best-paid years. For the RREGOP, this is the average of your best five consecutive years of eligible earnings.
It's one of the most advantageous plans on the market—and one that's becoming increasingly rare. It offers you predictable financial security through a guaranteed income that's unaffected by fluctuations in the stock market. In most cases, your pension is also indexed each year, helping to protect your purchasing power in retirement.
How do I calculate my pension benefits?
The formula varies from one plan to the next. Here's a concrete example to help you understand.
Let's say you've worked for the same employer for 30 years, with an average salary of $60,000 for your three best-paid years. Here's how your annual pension would be calculated:
30 years of service × 2% × $60,000 = $36,000 per year
You'd receive $36,000 gross (before tax) per year starting at retirement and for the rest of your life, or $3,000 per month. This is a good starting point, but it's important to make sure this amount will actually cover the cost of the lifestyle you're hoping to have when you retire.
Will I pay tax on the earnings from my defined benefit plan?
Yes. Earnings from a defined benefit plan are considered retirement income and are therefore taxable. The taxes will either be deducted at the source or paid when you file your tax return, depending on your situation.
To find out the exact rules of your plan, consult the plan participants guide you received from your employer. The estimated amount of your earnings should also appear on your annual statement.
Defined benefit plans vs. defined contribution plans
Defined benefit and defined contribution pension plans are two forms of registered pension plan (RPP). RPPs are registered plans that let you save for retirement and benefit from tax advantages.
But they work very differently:
| Type | Defined benefits | Defined contributions |
|---|---|---|
| What's guaranteed | The amount of your pension at retirement | The amount you pay in contributions |
| Who bears the investment risk | The employer | You |
| How the pension is calculated | Based on salary and years of service | Based on contributions and returns |
| Predictability | High | Variable |
| Investment management | Managed by the plan administrator | Variable: choice of funds sometimes available |
Not sure what type of plan you have? Consult the annual statement you receive each year or contact your company's human resources department.
Will your retirement plan provide you with enough money to fund your life plans?
Get a clear answer with My Game Plan. Our financial planning tool brings together all your retirement income sources (pension plan, government benefits, RRSP, TFSA, and more) and gives you an accurate picture of your future. It’s simple and reassuring!
The main defined benefit pension plans in Québec
In Québec, hundreds of thousands of workers participate in different types of defined benefit pension plans. These are the main ones.
RREGOP (Government and Public Employees Retirement Plan)
The RREGOP is the largest defined benefit pension plan in Québec. It covers employees in the Québec public service, health and social services, and education sectors.
The RREGOP calculates pensions using the following formula:
Years of service × 2% × average eligible salary of the 5 best-paid years
The RREGOP and the 90 factor
You may have heard of the 90 factor. Per this rule, in order for you to receive an unreduced pension, your age + your years of service must equal or exceed 90. For example, if you're 57 years old and have 33 years of service, you meet the 90 factor requirement.
If this is not the case for you, an earlier retirement may result in a reduced pension (link in French), depending on the rules of your plan (check your plan participants guide to confirm).
PPMP (Pension Plan of Management Personnel)
The PPMP applies to management personnel in the Québec public service sector: managers working in public service, education, and health and social services.
The PPMP calculates pensions using the following formula:
Years of service × 2% × average pensionable salary of the 3 best-paid years
Unlike the RREGOP, which uses the 5 best-paid years, the PPMP calculates your pension based on the salary of your 3 best-paid years, which can be advantageous if your salary has increased towards the end of your career.
Other defined benefit plans
Other defined benefit plans cover thousands of workers in Québec:
Municipal plans: Ville de Montréal, Ville de Québec, UMQ-affiliated municipalities, etc.
Parapublic plans: Hydro-Québec, Sûreté du Québec, STM, correctional services, etc.
Although the basic principles are similar (pension based on salary and years of service), each plan has its own rules. Consult your benefits guide to find out the details of your own plan.
What can I use to top up the pension payouts I receive from my pension plan?
Even if you have a defined benefit plan, you can often benefit from additional sources of income when you retire. The most common are public pensions, such as the Québec Pension Plan (QPP) and the Old Age Security (OAS) pension (OAS), as well as your personal savings (RRSP, TFSA, etc.), depending on your situation.
In Québec, you contribute to the QPP; elsewhere in Canada, it's the Canada Pension Plan (CPP). These benefits can be added to the pension you receive from your employer. To estimate the amount you could receive from the QPP, consult My Account (Retraite Québec).
Does participation in a defined benefit pension plan reduce my RRSP contribution limit?
Yes, and it's important to understand this in order to plan your savings properly.
Even if your pension contributions aren't being paid into your RRSP, they still reduce your RRSP contribution room for the following year. This is due to the equivalence factor.
The equivalence factor represents the estimated value of the benefit you are adding to your pension plan. It appears on your T4 slip and reduces the amount you can contribute to your RRSP the following year.
For example, if you have an equivalence factor of $8,000, your RRSP contribution room will be reduced by that amount. This is perfectly normal, based on the government's assessment that you're already saving for your retirement through this plan.
To find out how much RRSP contribution room you have left, visit My Account on the Canada Revenue Agency website.
Did you know?
Even with a pension plan, you can contribute to an RRSP+ with the Fonds and benefit from an additional tax savings of 30%[1] (until the year you turn 65). It's a great way to enhance your retirement savings and, by diversifying your portfolio, avoid one of the most common common savings mistakes.
What happens to my defined benefit pension plan if I leave my job?
Changing employers before you retire? You generally have a few different options available to you, depending on your situation and the rules of your plan:
- Leave your money in the plan: You retain your entitlement to a deferred pension, which you will receive when you reach retirement age.
- Transfer the value of your pension: You can transfer the commuted value of your pension to a locked-in retirement account (LIRA) or a locked-in RRSP.
- Switch to your new employer's plan: If your new employer allows it.
The rules vary depending on your plan and your specific situation (age, years of service, etc.). Talk to your plan administrator to find out what your options are. This decision can have a major impact on your retirement, so it's important to take the time you need to make an educated choice.
Understanding your plan: the key to a worry-free retirement
Defined benefit pension plans are among the best retirement savings solutions out there. But to get the most out this option, you need to understand how yours works.
Take the time to consult your annual statements, calculate your estimated pension, and evaluate whether this amount will be sufficient to live the retirement you want. After all, a well-planned retirement is one you can truly enjoy.
