How much is a public servant's pension plan worth?

How much is a civil servant’s pension plan worth?

UPGRADE DAY

This election campaign immerses us in some interesting thoughts on personal finance.

Question of the day: How much is a defined benefit (DB) pension plan worth? ? It sprang up in the wake of this QS plan to tax “great fortunes,” which would include workers' pension plans. to save to benefit from an equivalent retirement income? Let's see. 

Millionaires? 

In Quebec, there are more than 580,000 members of a defined benefit plan, according to Retraite Quebec. Millionaires? Allow me to doubt it, although there must be. They have in common to pay an annuity for life. The benefit is based on an average salary and years of service.

Typically, someone who spends their career with the same employer will receive the equivalent of 40% to 70% of their average salary upon retirement. The years considered to establish this average can make a good difference. For example, if we take the average of the five best salary years, the pension will be higher than if we retain the average remuneration of the last ten years. What makes these plans so valuable is the security they provide. Regardless of the storms that hit the financial markets, the annuitant will rest easy. A pensioner who has to rely solely on his savings runs the risk of seeing the end of it before he dies, with periods of emotion in the meantime. 

The calculation

So how much is it worth? The people involved have a good idea of ​​this, as their statement usually shows the “actuarial value” of their share in the pension fund. Also called “transfer value”, it is this amount that QS intends to include in the calculation of “fortunes”. This is the loot with which a person would leave if they gave up their pension when they left the employer. 

The actuarial value depends on the years of service, the pension promise, the ancillary benefits (before age 65), the indexation rate provided, the reversibility to the spouse. Another element that weighs very heavily: interest rates. The calculation of the future pension is based on bond rates. When rates are low, the actuarial value is higher, because with lower returns, more money is needed to produce the equivalent of the annuity. The reverse is also true.

Mélanie Beauvais, actuary and financial planner at Bachand Lafleur, did some calculations. We imagined a person who could be a nurse, with a good salary upon leaving, without being considerable: $80,000 at the end of a 30-year career.

At age 65, this person would be entitled to a pension of $48,000 (we have not indexed it, to simplify, the RREGOP provides for indexation at 50% of the CPI). In July 2022, the transfer value for this annuity would have amounted to $685,000, according to the actuary.  

I specify “July 2022”, because if the same calculation had been made a year earlier, when bond rates were significantly lower, the actuarial value would have been $850,000. (Add the mortgage-free house, our nurse would be one of the “great fortunes”!)

How much savings?  

Back to the $685,000. That's a lot of money. A woman (since we were talking about a nurse) who accumulated this amount in an RRSP could, with a return of 3.5%, withdraw $45,000 per year for 23 years. This represents his life expectancy at age 65. After that, it's over, calculates Mélanie Beauvais.

What percentage of our salary should we put in an RRSP to obtain a retirement income similar to a participant in a DB plan? It depends on your risk tolerance, so on the way you invest, but you already have a good idea of ​​the answer: it's 18% of your salary, which is the limit for RRSP contributions.

This ceiling was not established arbitrarily by an admirer of Serge Savard (who wore the number 18). It was weighed, calculated. This is the savings rate needed to ensure a retirement income that will be around 70% of what you earned during your working life.

How much is a civil servant’s pension plan worth?