Page 134 - A Canuck's Guide to Financial Literacy 2020

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Pension Formulas

Final Average Earnings Formula

The final average earnings formula is based on your average earnings leading up to
retirement.
Benefit = Benefit Factor x Average Earnings x Number of Years of Pensionable
Service
Example: Dave worked with TD Bank for over 25 years. His average salary over the last 5
years has been 60,000 a year. Using a benefit factor of 2%, what is his annual pension?

o 2% x $60,000 x 25 = $30,000

Career Average Earnings Formula

This formula is based on your average earnings throughout the time you were a part of the
company's pension plan.
Benefit = Benefit Factor x Average Earnings x Number of Years of Pensionable
Service
Example: Mike worked with CIBC for over 30 years. His average salary over the 30 years
was $55,000 a year. Using a benefit factor of 2%, what is annual pension?

o 2% x $55,000 x 30 = $33,000 per annum.

Flat Benefit Pension Formula

This is a formula that where your monthly pension benefit is determined by a fixed dollar
amount for each year you were part of the plan
Benefit = Flat Amount x Number of Years of Pensionable Service
Example: John has been working with Scotiabank for the last 35 years and has been a plan
member since he started. His benefit amount is $40 per year for each year he is a plan
member. What would be his annual pension?

o $40 * 35 = $1400 per month.
o $1400 * 12 = $16,800 per annum.

Risks of Defined Benefit Plans

In Defined Benefit Plans, the employers have the risk and the responsibility in making sure
that the employees receive the entitled benefit in retirement. This means that the employer
bears the risk in making sure that the returns generated on the investment of employees will
be enough. Due to this risk, defined benefit plans have high cost of administrations due to
their requirement of complex actuarial analysis and insurance for guarantees.