Miscellaneous
OTPP
Ontario Teacher's Pension Plan
Hoopp
Healthcare of Ontario Pension Plan
OMERS
Ontario Municipal Employees Retirement System
McGill
Carpenters
Defined contribution
In a defined contribution plan, the employee bears the full risk of the investment of the assets. In each period, the employer and the employee contribute an agreed (i.e., defined) amount to the employee’s pension fund. The pension fund is invested (very often, by the employee, in whatever way she or he may want) and becomes available to the employee at the retirement.
Comparing to the defined benefit plans,
the pension size is uncertain and it varies with stock market returns. In practice, if you retire in a year like 1999 or 2017, you are in much better shape than under the defined benefit plan. If you retire in a year like 2001 or 2008, you are in a much much worse shape. Because income security is a key issue during the retirement, many people prefer the defined benefit plan.
Additionally, the employee enters retirement with a pot of money, rather than a pension. It is the employee’s decision what to with it. Some options:
withdraw all the money now and use it to buy a house on a tropical island. That is not necessarily advisable because if all money are withdrawn in one year, they will taxed in this year, which eliminates one of the largest benefits of deferred taxation on retirement savings: lower marginal tax rates,
withdraw a fixed amount from your savings each year. The longevity risk is a problem. If one lives too long, the savings may run out. If one lives too short, you save too much and leave more than you want to your heirs.
more typically, people in the defined contribution plans use their pension fund buy annuities that provide fixed income. Such annuities insure individuals against the longevity risk.
The Cap
The Cap arises from the federal Income Tax Act . The government limits how much pension benefit can earned by an individual per year of service. The reason that pension benefit for the government means delayed taxes. They don’t want people to manipulate their tax burden by playing with pension.
In the case of current plan, each contribution $1 is used to compute the pension benefit that the person earned. The value of the benefit for the Cap purposes depends on the form of the benefit (see, pension formula), actuarial assumptions, etc. Hence, it is different for each plan. Because the benefit cannot by larger than the ITA limit, the contributions are also bounded. This leads to an upper bound on the pensionable salary, or The Cap. At this moment, the Cap for our plan is around $160,000.