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Insights & advice

Types of pension plans

August 2021 – 15 min read

Key takeaways

  • There are 3 types of group pension plans offered by Canadian employers:

    • Defined benefit pension plan (DBPP)
    • Defined contribution pension plan (DCPP)
    • Pooled registered pension plan (PRPP)
  • With a DBPP, you’ll know how much you’ll receive in pension at retirement.

  • DCPP is now what most employers are providing. It allows contributions and investment income to accumulate to provide a retirement income and provides benefits to investing on your own.

  • A PRPP is for self-employed workers and those whose company doesn’t offer a pension plan.

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What’s a DCPP?

With a defined contribution pension plan (DCPP), the amount of money put into the plan is defined but the amount of money you’ll receive at retirement is not.

Benefits of a DCPP

You may be required contribute a percentage of your pay into the plan. Your employer must contribute to the plan and may match some of your contributions.

If your plan allows it, you decide how and where to invest your money, taking into consideration your risk tolerance and investment goals, like a registered retirement savings plan (RRSP).

The amount available for you at retirement depends how much you’ve put in and the investment returns you’ve made on that money.

To turn this money into retirement income, you can purchase an annuity from an insurance company or transfer the money into a locked-in retirement income product such as a life income fund (LIF), locked-in retirement income fund (LRIF)), restricted life income fund (RLIF) or prescribed registered retirement income fund (PRIF).

Disadvantages of a DCPP

The amount of income you’ll receive in retirement isn’t guaranteed.

What’s a DBPP?

A defined benefit pension plan (DBPP) defines the amount of pension you’ll receive in retirement. 

It’s usually calculated using a formula that includes your age, how much you make, and how long you’ve worked at your employer.

Benefits of a DBPP

In most cases with a DBPP, both you and the employer put money into the plan.

Your employer invests the money and is responsible for making sure there’s enough money in the plan to pay pensions in the future. If not, the employer must cover the difference.

Disadvantages of a DBPP

  • You have no control over how or where the money in the plan is invested.
  • When you die, some DBPPs only allow a part of the pension to be transferred to a spouse.
  • For employers, DBPP plans are expensive, which is why many have switched to DCPPs.
  • Administration is complex
  • For most DBPPs, you’ll need to stay with a company for a minimum number of years to qualify.

What’s a PRPP?

A pooled registered pension plan (PRPP) is offered by financial institutions on behalf of many employers (and their employees), and self-employed people. It works similar to a DCPP. 

In Quebec, their PRPP is called a voluntary retirement savings plan (VRSP).

Benefits of a PRPP

  • It’s designed for people who wouldn’t otherwise have access to a workplace pension plan. 
  • More flexibility for managing your investment and achieving your retirement savings goals than other pension plans.
  • You’ll pay less administration costs due to being in a large, pooled pension plan than you would investing yourself.
  • If you change jobs or careers, the plan can move with you. 

Disadvantages of a PRPP

  • PRPPs aren’t available in all provinces.
  • The amount of income you’ll have in retirement isn’t defined.

Choosing a group pension plan vs. an RRSP

There are great reasons to join your company pension plan. Your employer may match your contributions, helping you save for retirement faster. Your money can grow tax-free as long as it’s in the plan and if it’s a DBPP, you know how much you’ll get in retirement.

If your company pension plan is a DCPP, it’s similar to an RRSP, except the RRSP has these benefits:

  • You choose the financial institution and type of plan to save with.

  • You can make taxable withdrawals at any time with no penalty.

  • You can contribute to your spouse’s RRSP and vice versa.

  • Above-limit contributions can be rolled over to the next year.

If you want more control over how your savings are invested, or you’d like to use your RRSP for things like buying your first home, financing lifelong learning, helping your spouse or partner to be able to save for retirement, then a RRSP may be your best option.

Depending on the retirement lifestyle you want, you may choose to have both a group pension plan and a RRSP. 

  • However you choose to save for retirement, getting started early is the best way to help you be financially secure in retirement. For more information on group pension plans and RRSPs, contact your advisor.

What’s next?

Now that you know more about the various types of pension plans, you may want to contact your advisor to:

  • Confirm which type of pension plan you have and how to make the most of it

  • Determine how much retirement income you can expect from the government

  • Calculate your total retirement savings

  • Create a retirement savings plan to help save for any shortage between your retirement income and expenses