The Revenge of the Defined Contribution Plan? Not So Fast
Defined Contribution Pensions are Looking Good!
Imagine a 60-year-old Canadian receiving a pension of $4,200 per month for life. An actuary might tell them that pension is worth nearly $1 million. Most people would shrug. Offer them a cheque for $1 million instead, and suddenly everyone’s attention is captured. This is, in essence, the opening hook in an article on the Defined Contribution Pension Plan in a recent issue of the Financial Post.
There are many elements in this article that will appeal to us.
- Stock markets have performed exceptionally well in recent years.
- Defined Contribution (DC) pension account balances have grown dramatically.
- A large account balance now feels tangible.
- The promise of steady payments for the rest of your life from a Defined Benefit (DB) pension feels abstract.
Perhaps defined contribution plans are making a comeback. Perhaps the old assumption that defined benefit plans are the gold standard deserves reconsideration.
But is a growing account balance really the right way to evaluate a pension?
What Seems Wrong
This article immediately caught my attention. As a financial planner, as someone planning on full retirement by the end of 2026, and as someone with both a small DB plan as well as a DC plan from a previous employer, the headline struck me as both intriguing and dubious. The assertion felt wrong.
The article compares rising DC account balances against more conservative DB pension performance.
Yes, both are registered pension plans, and both are intended to help employees build financial resources to see them through retirement, but these plans approach this goal rather differently.
What is a Pension?
A pension is not primarily an investment account. Its purpose is to convert years of savings and contributions into income that can support a retiree throughout life.
What’s Being Emphasized
Repeatedly, the article emphasizes account values, market returns, and wealth accumulation. Conversely, less attention is given to guaranteed income, longevity protection, or retirement sustainability.
The Risks that are Being Downplayed
The rosy picture of DC plans that are downplayed in the article include:
- investment risk
- Your retirement outcome depends on how well your chosen investments perform, and markets don’t always cooperate
- behavioural risk
- Your own reactions to the performance of the funds you invested in, such as hesitating, chasing returns, or panicking, can quietly undermine long‑term results
- sequence-of-returns risk
- Poor investment returns in the early years of retirement can drain your portfolio faster, even if average returns look fine.
- longevity risk
- You may simply live longer than your savings do, stretching your portfolio beyond what it was built to support
Let’s consider an example that combines investment risk and sequence-of-returns risk.
Imagine two workers who retire with identical defined contribution pension balances and identical investment strategies. The only difference is timing.
Worker 1 retires in January 2000. Like many investors in the late 1990s, a significant portion of his portfolio is invested in equities. Within months, the technology bubble bursts. Over the next several years, stock markets around the world suffer substantial declines. Just as markets begin to recover, the Global Financial Crisis strikes in 2008.
For a retiree who is simultaneously withdrawing money from a portfolio, these early losses can be devastating. Even if markets eventually recover, the withdrawals made during the downturn permanently reduce the amount of capital available to participate in the recovery. This is known as sequence-of-returns risk. Two investors may earn the same average return over a lifetime, but the order in which those returns occur can dramatically affect retirement outcomes.
Worker 2 retires in January 2010. He experiences the opposite sequence. Having retired shortly after the Global Financial Crisis, he begins retirement during one of the strongest and longest bull markets in history. His portfolio benefits from rising asset values during the crucial early years of retirement.
Both workers saved diligently. Both invested similarly. Both acted responsibly. Yet their retirement experiences could be dramatically different simply because one retired before a prolonged period of poor market performance and the other retired after it.
A member of a defined benefit pension plan would have been largely insulated from this risk. The pension income would continue regardless of market conditions because the investment and longevity risks are pooled across the plan’s membership rather than borne by a single retiree.
This illustrates an important point. Comparing the value of a DC account balance to a DB pension can miss the real question. The issue is not simply which plan accumulates the largest amount of money. The issue is which plan provides the most reliable retirement income.
The Purpose of a Pension
The purpose of a pension is not to maximize wealth. Yes, in the case of a DC pension plan, having a large lump sum is an important part of its purpose. However, that balance is there for a reason, that is, to provide sustainable lifetime income.
A DB plan answers the question, “How much can I safely spend every month for the rest of my life?”
A DC plan answers a different question: “How much money have I accumulated?”
Both are important, but they are not identical questions, at least not until the DC plan is converted to an income stream.
Risk Pooling
A DB plan “pools” investment risk, longevity risk, and in the case of some plans, inflation risk. It does so by spreading those risks across thousands of members of the plan. A DC plan effectively individualizes those risks and requires each member to choose their own investments and bear the risk of making a poor choice.
When looked at in this way, the perspective offered by this story begins to look different.
A Surprising Reversal
To the person only looking at the current value of their retirement plan, the real value of a DB pension appears invisible. Its greatest strengths do not show up in a bull market, but when things go wrong. Some of those “wrong things” are market crashes, recessions, poor investment decisions, and longer-than-expected lifespans. Admittedly, the last point is not a problem in the ordinary sense. Living longer is generally something we hope for. However, if you planned to exhaust your assets by age 80 and then live to 95, longevity can create a financial challenge that many retirees underestimate. A DB pension, on the other hand, keeps on paying no matter how long you live.
The Underappreciated Employer Contribution
Many workers fixated on the value of their DC plan balance may overlook another important reality. The value of a DB pension often comes not only from investment returns but from substantial employer funding. The pension may be worth more than it appears because employers contribute heavily and are responsible for maintaining the solvency of the plan across generations.
A Balanced View
I want to be clear that I am not arguing that DC plans are bad. Indeed, they have many benefits. They typically offer:
- Portability – if you change employers, you can transfer it into a locked-in retirement account;
- Flexibility – you can often choose from among a wide range of investment options;
- Ownership – a DC plan belongs to you;
- Estate Value – the entirety of a DC plan’s value can pass on to your beneficiaries, and if it goes to a surviving spouse, there are no immediate tax implications.
For disciplined and thoughtful investors, DC plans can produce excellent outcomes. But they also require knowledge and emotional resilience.
The comparison is more nuanced than the article suggests. One of the odder comments was made by a financial planner who said that he “recommends a defined contribution plan.” In most cases, there is no recommendation available. Either your employer offers a DC plan or a DB plan. I suppose you could look for a job that offers one vs. the other pension, but for most people, any kind of employer-sponsored group retirement savings scheme, including a group RRSP, is welcome.
So how should Canadians think about pensions?
The Practical Takeaway
I would argue that, instead of asking about account balances, consider how to use whatever plan you have available to help achieve retirement security. Sometimes, that may mean having to do it on your own, or with the help of an advisor, and investing for the long term within Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
A Broader Definition of Wealth
Wealth for retirement is not only an account statement.
In the form of DB pensions, annuities, and government schemes like the Canada ( or Quebec) Pension Plan (CPP/QPP), Old Age Security (OAS), and possibly the Guaranteed Income Supplement (GIS), it includes things like:
- guaranteed income;
- protection against longevity risk;
- protection against poor timing; and
- protection against our own behavioural mistakes
The recent performance of defined contribution plans may be impressive. But before declaring the “revenge” of the DC plan, it is worth remembering that the purpose of a pension is not to win a bull market. It is to provide income and security for a lifetime.
Let me close with a final question: If you had to choose between a larger account balance and greater certainty that your income would last as long as you do, which retirement problem are you really trying to solve?
This is the 309th blog post for Russ Writes, first published on 2026-06-08.
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