Reading about pensions can feel like you're reading a Dr. Seuss book. The complex terms and acronyms can seem like gobblegook to the uninitiated.
That's why the Star asked pension experts to decipher some key pension-related terms. Following is a beginner's guide to pension vocabulary:
Deferred Income Plan Vehicles: This refers to different tools to save retirement income that you will receive at a later date. In Canada, this includes Registered Retirement Savings Plans and registered pension plans. Contributions to RRSP's and registered pension plans are tax deductible and any investment earnings are tax-sheltered. Money is taxed when it is withdrawn, says James Pierlot, a lawyer and consultant with Towers Perrin, a professional services firm that helps employers establish and administer pension plans.
DB Pension Plan: A Defined Benefit pension plan is a registered pension plan that promises a certain benefit at retirement according to a formula the plan contains. There are different kinds of formulas. For example, a flat benefit DB pension plan might provide a lifetime pension based on $10 per month multiplied by the number of months an employee worked at a company. Another type of formula depends on the member's earnings over the years he or she belonged to the plan. The most generous DB pension plans are those "which calculate the pension based on a percentage of final average earnings multiplied by years of service," Pierlot says. DB pension plans are common in the public sector.
DC Pension Plan: A Defined Contribution pension plan is a registered pension plan where the amount of contribution going into a plan is defined, says Karen Lockridge, national partner at Mercer, an HR consulting firm that provides advice and solutions for companies' retirement plans. With a DC pension plan, an employer regularly puts a certain amount of money into an individual plan account in the employee's name. In many cases, employees will also contribute to this account. For example, a plan might say employees must contribute 3 per cent of their salary and the employer will match that contribution at 100 per cent. Money in the plan must be invested.
With a DC pension plan, the amount an employee receives at retirement will depend partly on earnings in the individual's account.
With a DB pension plan, the benefit to be received at retirement is defined.
Vested: This refers to when an employee has acquired a right to the retirement income. In Ontario, depending on the plan, an employee may have to work for an employer for up to two years before he or she gets a right to benefits in the plan. .
Locked in: When your pension benefits are vested, the pension income is typically locked in. This means the pension money must be used to provide retirement income.
MER: A Management Expense Ratio is the percentage fee that the fund management company charges each year. It's "perhaps, one of the most important things for a DC Pension Plan member or an RRSP investor to think about when they are choosing funds," Pierlot says.
FSCO: The Financial Services Commission of Ontario administers and enforces the Ontario Pension Benefits Act and regulations. For more detailed information about pensions, visit the commission's website at www.fsco.gov.on.ca
