There are several types of private pension plans, also called supplemental pension plans, employer-sponsored plans or pension funds. They can be defined contribution pension plans, defined benefit pension plans, deferred profit-sharing pension plans or group RRSPs.

Either the employer, the employee or both contribute to these plans. After a few months or a few years, depending on the plan provisions and laws governing pension plans, the contributions, which have accumulated in the employee's account (or a corresponding value), are vested in that employee. Accordingly, this money is paid out when the employee leaves his or her job prior to retirement.

Defined contribution Plans

Under a defined contribution plan, employees are paid an annuity that is based on the amount that has accumulated in their account when they are ready to retire. The amount of the annuity is not known in advance and is based on the total contributions made by the employee and employer as well as the investment income earned over the years. Under such a plan, the contribution amount is set in advance, and the risks resulting from fluctuations in returns are assumed by the participants, that is, the employees.

Defined Benefit Plans

The defined benefit plan is the most common. Contributions may vary depending on the terms of the individual plans. However, employees will receive a guaranteed life annuity at retirement, the amount of which is known in advance. Generally, it corresponds to a percentage of their salary multiplied by their years of service. In other words, the value of this annuity increases over the years, until retirement.

Deferred Profit-Sharing Plans

The deferred profit-sharing plan is the least common. As its name suggests, it is a
profit-sharing plan that provides for an annual payment of a percentage of the Company's profits to the employees. Only employers make contributions.

Group RRSPs

Finally, a group RRSP is like an individual RRSP, except that it is offered by the employer. The employee's participation in such a plan is optional, and employers usually do not contribute.

Government- Registered

All these plans have one thing in common: they must be registered by the government. This means that employees can deduct the contributions from their taxable income. Moreover, the fund or future retirement annuity accumulates tax-free, as in the case of RRSPs.

Vested Benefits

Vested benefits designate the amounts that were paid or accumulated on the employee's behalf over the course of one year. Under a defined contribution plan or deferred
profit-sharing plan, these benefits represent the total contributions made by the employee and employer over one year. Under defined benefit plans, they correspond to the value of the annuity vested over one year.

Pension Adjustment

Another term related to vested benefits is the pension adjustment. It is a measure that establishes the value of the benefits vested in a participant during the course of one year. This term is used in reference to defined contribution or benefit plans as well as deferred profit-sharing plans.

Contribution Room

Lastly, participants in a supplemental pension plan may also contribute to a personal RRSP. The total of their contributions to an individual RRSP, a group RRSP and any other supplemental pension plan (pension adjustment) over the course of the year, however, must not exceed the amount corresponding to their contribution room, which is equal to 18% of their income for the previous year in addition to their unused contribution room from previous years.

If you find all these calculations confusing, don't worry. Your pension adjustment is calculated by your pension plan administrator. Moreover, it appears on the income statements you receive from your employer at the beginning of the year. The Canada Revenue Agency sends out a notice of assessment, which specifies the eligible RRSP contribution for the upcoming year.