What is an employer pension plan?

Retirement accounts go by many names, one of which is a “pension.” A pension typically refers to a retirement account sponsored by an employer. However, there are different types of pension plans, which have different rules and regulations. Here, we’re exploring the Employer Pension Plan—a coveted account offered by some employers across Canada that provides a stable income for employees once they retire. Keep reading to learn the nitty-gritty details of Employer Pension Plans, how you can get your hands on one, and what to do if you can’t.

What is an Employer Pension Plan?

An Employer Pension Plan, or EPP as it’s commonly called, is a retirement account afforded to employees by their employer. Like other retirement accounts, money is contributed to an EPP on a regular basis throughout employment and invested so that it can grow and provide a source of income in retirement years.

EPP contributions are made by either the employee and their employer or solely the employer. This is where the great benefit of an Employer Pension Plan lies. Whether your employer matches your contributions or contributes entirely, you are basically receiving free money now that can grow to a great deal of money over time that will hopefully be able to support you later in life.

What you need to know about EPPs

Unfortunately, nothing involving money, taxes, and multiple parties is so straightforward. Let’s break down everything you need to know about Employer Pension Plans.

1. They’re investment accounts

Employer Pension Plans are a kind of investment account specifically for retirement funds. This means the money that is in the account is invested in a few or many investment products such as individual stocks, bonds, and mutual funds. What your EPP is invested in will affect how much your money will grow and how much risk it is subjected to.

2. Control over your account varies

Employer Pension Plans are managed in various ways: Often the money you and your employer contribute is invested on your behalf by a pension plan manager or a third party company. Sometimes, though, you are afforded some control over how your money is invested.

If you’re savvy with investments, you may want more control over your account, but if you’re unfamiliar or uncomfortable with the wild world of investing, you may be perfectly OK with someone else managing your account. The important thing is that you know how your account is managed and if it is managed by someone else that it aligns with your risk tolerance and your values.

3. You can’t take it with you when you go

If you leave your job, all contributions by both you and your employer to your EPP will stop and you will need to determine what to do with your account. You can leave your money where it is and transfer it when you retire, you can transfer the money to the retirement plan at a new employer, if they have one, or you can transfer it to a retirement income account if you’re of retirement age.

4. How they are taxed

As with any retirement account or income, for that matter, how it is taxed is important to know. If you aren’t aware of the tax benefits and laws surrounding your accounts, you could miss out on potential tax savings. Contributions to Employer Pension Plans are tax-deductible for both the employee and employer. This means the amount you contribute to your EPP in a given year can be deducted from your annual income, therefore lowering your taxable income.

Contributions are also typically made with pre-tax dollars, and thus, the funds are tax-deferred. When you retire, the withdrawals you make from your account will be considered income, which means they will be taxed at your income tax rate at the time of withdrawal.

5. They’re not available to everyone

Not all employers offer pension plans. While they used to be far more common, today less than 40% of employed Canadians have an Employer Pension Plan. So, if you’re in the process of interviewing for a job or entertaining offers, consider carefully not only the salary but also the benefits. A pension plan could be worth a lot more than the difference in annual pay.

6. There are different types

Not all EPPs are created equal, and while they vary on many details such as how they are managed, and how long you need to work to receive them, there are two main types of pensions. Let’s take a look.

The different types of Employer Pension Plans

There are two types of Employer Pension Plans and it’s important to know the difference. If you’re not sure which one your employer offers, talk with an HR representative or the person managing the pension plan to learn more.

1. Defined contribution plans

A defined contribution pension plan has “defined contributions.” This means you and your employer, or just your employer, contribute a designated amount annually, monthly, or with each paycheque over the course of your employment.

When you retire, the amount of money you receive as income from your pension plan is determined by how much your contributions have grown. The better your investments have performed over the years, the more money you will have in retirement.

When the time comes for you to retire, you will need to transfer the funds from your investment account to an annuity, a locked-in registered retirement savings plan or locked-in registered retirement income fund, or a combination of the two.

As we mentioned above, the terms of EPPs vary, so it’s important to understand what the terms of your plan allow. For instance, you may be able to reinvest some of this money from your pension plan in another investment account, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) that is not locked in, if the terms and your age allow. If you retire early or leave your job for another, one of these options would allow your money to continue to grow until you need to depend on it for income.

2. Defined benefit plans

A defined benefit pension plan has “defined benefits”. This means your employer promises to pay you a designated amount after you retire. This can be particularly enticing for people with a low risk tolerance or a high desire for security because their retirement income is assured, not dependent on how their investments perform.

With this type of pension plan, both you and your employer or just your employer still make regular contributions to the plan, but your employer or a pension plan manager they hire typically has total control over investing the money. While the amount you receive as income when you retire isn’t dependent on how the investments perform, it is usually dependent on your salary and the number of years you contributed to the plan or worked for the employer.

This type of pension plan is the most common for people in public service, such as police officers and firefighters.

Other ways to save for retirement

An Employer Pension Plan is just one way to save for retirement while working. While less than half of Canadian employers still offer EPPs, that doesn’t mean they don’t offer another type of account to help you save for retirement. Here are a few other retirement options to look for when reviewing your benefits package:

Pooled Registered Pension Plans

It can be quite expensive for businesses to offer and manage pension plans, which is why small operations oftentimes don’t. A Pooled Registered Pension Plan (PRPP), however, is a lower-cost option because assets are pooled and managed by an administrator. Your employer may choose to offer a PRPP instead of a regular pension plan to avoid high operating costs, but you can still reap the benefits of having your contributions invested for growth and income during retirement. Unlike EPPs, PRPPs are attached to the employee, not the employer, so you can continue to contribute to yours if you switch jobs. If you are self-employed, a PRPP is a good option to consider. Learn if it’s right for you by reading the answers to these frequently asked questions.

Group Registered Retirement Savings Plans

Unlike a Registered Retirement Savings Plan (RRSP) that you open, fund, and manage yourself, a Group RRSP can be funded and managed by your employer. You would still open the account and could contribute as much as you like up to the yearly limit, but your employer could also contribute (this is up to each individual employer).

Personal retirement savings accounts

Should your employer not offer any pension plan or other retirement savings account, you’re not out of options yet. While a retirement account is a wonderful benefit that many companies should supply if they want to contribute to the financial wellness and happiness of their employees, it’s not the only way to secure an income for retirement. Explore individual Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) options (you can have both) to ensure that you’re putting aside money now for the future.

Whether you contribute to an EPP or an RRSP, the important part is that you plan for retirement. It may feel like a sacrifice at the moment to contribute much of your income to an account you won’t tap into for decades, but it means you won’t have to sacrifice or stress later when you are retired and you can simply relax and enjoy the fruits of all your labouring years.