Don’t get the retirement age wrong in personal injury claims
This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc.
The selection of a retirement age is generally a key assumption in the quantification of personal injury claims. When an employee participates in a defined benefit pension plan, it is often assumed that the most appropriate retirement age is when the employee is eligible for an unreduced pension. An unreduced pension is often described as a full pension, thereby suggesting that a rational employee will choose to retire when they have maximized their pension. However, an “unreduced pension” and a ‘full pension’ are not one and the same.
In a defined benefit pension plan, an employee’s retirement benefit is based on a pre-determined pension formula. For instance, the pension formula may be based on average earnings and years of pensionable service. If an employee retires prior to their normal retirement age, which is defined in the pension plan, their pension may be reduced because they will receive pension payments over a longer period. The pension plan may also allow an employee to retire prior to their normal retirement age with no reduction to their accrued pension should they meet certain criteria. That is, they will be eligible for an unreduced pension.
Under the Ontario Teachers’ Pension Plan (OTPP), a teacher can retire with an unreduced pension once they achieve an 85 factor, or when their age plus years of service total at least 85. For example, if a teacher starts to participate in the pension plan at age 29, they could be eligible for an unreduced pension as early as age 57 (85 factor = 57 years of age + 28 years of service). The question is, will this teacher choose to retire at age 57 because they have achieved a “full pension?” They may very well choose to retire, but it will not be due to having achieved a full pension.
The term ‘full pension’ should generally be reserved for a defined benefit pension plan that provides for a maximum pension, often by placing a cap on the number of years of pensionable service that one can accrue.
Under the Ontario Municipal Employees’ Retirement System (OMERS), a maximum of 35 years of pensionable service can be accrued. For example, a City of Toronto police officer who starts to participate in the OMERS plan at age 25 will achieve a full pension at age 60, after 35 years of pensionable service.
However, under the OMERS plan applicable to police officers, an unreduced pension would be achieved after reaching an 85 factor or after reaching 30 years of service, whichever comes first. Thus, this police officer could start collecting an unreduced pension as early as age 55 (85 factor = 55 years of age + 30 years of service), but they would have had to continue to work until age 60 to reach a full pension.
Under OTPP, there are no maximum years of pensionable service, meaning that a teacher can continue to increase their lifetime annual pension the longer they teach. In other words, a teacher will theoretically never reach a full pension. Does this mean our teachers will teach until they turn 70? Not necessarily. Many public sector defined benefit pension plans have incentives for long-term employees to retire earlier through additional pension payments, known as bridge benefits, that are payable until age 65.
It is difficult to predict one’s retirement age, in particular for a young, injured plaintiff whose retirement is several decades into the future. For those closer to retirement, it is best to see if any specific retirement plans were set prior to being injured. Personal circumstances other than when one achieves an unreduced or full pension should also be considered.
From a financial perspective, an employee may decide to continue working in order to increase their retirement savings and pension benefits should they feel that the gap between their full-time earnings and their accrued pension is sufficiently large. From a job satisfaction perspective, an employee may love their job and choose to delay their retirement for that reason alone.
Alternatively, one may choose to retire early and pursue new employment elsewhere while in receipt of a pension, however this may or may not be allowed if their new employer participates in the same pension plan. For instance, a police officer may decide to retire at age 55, but then pursue employment as a security officer in the private sector while collecting a pension.
Ultimately, when one retires is a personal choice. However, it is important to be aware that the age when one achieves an unreduced pension should not be interpreted as a definite or definitive retirement age.