Pension Service Buyback vs Investing in XEQT: The Math for Canadian Government Workers

My cousin Marcus got a permanent position with the federal government in 2021. Before that, he’d spent three years as a term employee – same department, same desk, same work – but as a term worker, he wasn’t contributing to the public service pension plan for the first 14 months of that stretch. When he finally got his letter of offer for indeterminate status, HR sent him a package with a number that made him choke on his coffee: $28,400.

That was the cost to buy back those 14 months of pensionable service he’d missed. Fourteen months that, if purchased, would count toward his pension as if he’d been contributing all along. Fourteen months that would bump up his eventual retirement income by roughly $3,800 per year, guaranteed, indexed to inflation, for the rest of his life.

He called me that evening. “Should I do it? Or should I just throw twenty-eight grand into XEQT and let it ride?”

It’s a question that thousands of Canadian public sector workers face every year – federal employees under the PSSA, teachers under the OTP, nurses under HOOPP, military members under the CFSA, RCMP officers, provincial and municipal workers. You have a defined benefit pension. You have a gap in your service. Your employer is offering you the chance to fill that gap. And you’re wondering whether the guaranteed pension income is worth more than what you could build by investing the same money in a low-cost, globally diversified equity ETF like XEQT.

This is one of the most consequential financial decisions you’ll make. Let’s break it down properly.

1. What Is a Pension Service Buyback?

If you work in Canada’s public sector, you likely belong to one of the country’s major defined benefit (DB) pension plans. These plans promise you a retirement income based on a formula – typically something like 2% x years of pensionable service x average of your best five years of salary. The more years of service you have, the bigger your pension.

A pension service buyback lets you purchase credit for periods when you were working but not contributing to the pension plan – or for certain types of prior service that your plan recognizes. Common buyback situations include:

• Term or casual employment before becoming permanent (federal public service)
• Leave without pay (parental leave, education leave, personal leave)
• Part-time service where you want to top up to full-time equivalent
• Prior service with another eligible employer
• Military service before joining the regular force pension plan
• Teaching service in another province before joining OTP or another provincial plan

Here’s a quick look at the major DB pension plans in Canada where buybacks commonly arise:

The common thread: all of these plans use a formula where more years of service = more pension income. A buyback adds years to that formula, directly increasing your guaranteed retirement income.

2. How the Buyback Cost Is Calculated

This is where most people’s eyes glaze over, but understanding how the cost is determined is critical to evaluating whether it’s a good deal.

When you elect to buy back pension service, your pension plan calculates the cost using what’s called an actuarial present value. In plain English, they figure out how much your additional pension income will be worth over your expected lifetime, discount it back to today, and charge you that amount. The main factors are:

Your current salary

The cost is based on your salary at the time you make the election – not your salary during the period you’re buying back. This is a crucial detail. If you earned $45,000 as a term employee but now make $85,000 as an indeterminate, the buyback cost is calculated on the $85,000 figure.

This means the longer you wait to buy back, the more expensive it gets, because your salary typically goes up over time. If you’re considering a buyback, doing it sooner rather than later usually saves you money.

The contribution rate

Most DB plans require you to pay what you would have contributed during the buyback period, plus interest. The employee contribution rate for federal public servants is currently around 9.5-10.5% of salary (the rate varies depending on whether your salary is above or below the Year’s Maximum Pensionable Earnings for CPP). For teachers and healthcare workers, rates are similar.

Interest charges

If more than a few months have passed since the period you’re buying back, your plan adds interest to account for the time value of money. The interest rate used is typically the plan’s actuarial assumption rate, which might be 4-6%. This interest can add substantially to the cost, especially for buybacks of service from many years ago.

A real example

Let’s use a scenario similar to Marcus’s situation:

• Period being bought back: 14 months of term employment
• Current salary at time of election: $85,000
• Contribution rate: 9.8% of salary
• Time since the period: 3 years
• Interest rate applied: 4%

The base cost would be approximately: $85,000 x 9.8% x (14/12) = $9,718

With three years of compound interest at 4%: $9,718 x (1.04)^3 = $10,933

But wait – the actual buyback cost Marcus received was $28,400. Why the difference? Because the plan doesn’t just charge you the missed contributions. For elections made after a certain window (usually within one year of becoming eligible), the plan charges the full actuarial value of the additional pension benefit, which accounts for what the employer would have contributed too, plus the expected cost of providing you with an indexed pension for decades. The actuarial cost is almost always significantly higher than the “single contribution” rate.

The takeaway: ask for your personalized buyback quote early. The cost varies dramatically based on your age, salary, and how long ago the service occurred. Get the actual number from your pension administrator before making any decision.

3. The Math: Pension Buyback vs Investing in XEQT

This is what you came for. Let’s run through a specific, realistic scenario and compare both paths side by side.

The scenario

• Person: Federal public servant, age 32
• Buyback cost: $30,000 for 3 years of prior term service
• Current salary: $90,000
• Expected best-5 average salary at retirement: $120,000 (in today’s dollars)
• Normal retirement age: 60 (with 30+ years of service)
• Years until retirement: 28

Path A: Buy back the pension service

Buying 3 years of service adds to the pension formula:

• Additional annual pension: 2% x 3 years x $120,000 = $7,200/year
• This pension is indexed to inflation (federal plan uses a form of CPI indexing)
• It includes survivor benefits (spouse receives up to 50-60% upon your death)
• It starts at age 60 and continues for life

What’s the total value of $7,200/year indexed to inflation, starting at age 60? If our public servant lives to 85 (25 years of pension payments), and we assume 2% inflation indexing, the nominal total pension income from the buyback would be approximately:

Total pension income from the buyback over 25 years: approximately $227,000 in nominal dollars – all from a $30,000 investment. And if you live past 85, it keeps going. That survivor benefit also continues to your spouse.

Path B: Invest $30,000 in XEQT instead

Now let’s see what happens if you skip the buyback and invest $30,000 in XEQT in a TFSA (or RRSP) instead.

Using an assumed 7% average annual return (conservative for a 100% equity portfolio, which has historically averaged 8-10%):

At retirement (age 60), your $30,000 has grown to approximately $199,500 in nominal terms.

Now, here’s where the comparison gets interesting. If you withdraw 4% per year from that XEQT portfolio (a standard safe withdrawal rate):

• Year 1 withdrawal: $199,500 x 4% = $7,980/year

That’s actually more than the $7,200 annual pension increase from the buyback in the first year. But there are critical differences:

The pension advantage

• The pension is guaranteed for life – you can’t outlive it
• The pension is indexed to inflation automatically
• The pension includes survivor benefits
• The pension requires zero investment decisions or monitoring
• The pension is backed by one of the best-funded plans in the world

The XEQT advantage

• Your $199,500 is yours – you own it, control it, and can access it anytime
• If you die early, the full balance goes to your estate (not just a survivor benefit)
• If markets do better than 7%, you could have significantly more
• The money is portable – it goes with you if you leave the public service
• In a TFSA, all growth and withdrawals are completely tax-free

4. Comparison Table: DB Pension Buyback vs XEQT

Here’s the head-to-head breakdown that makes the trade-offs crystal clear:

5. Tax Implications: The Hidden Math

The tax angle is one of the most misunderstood parts of the buyback-vs-invest decision, and it can significantly change the math.

Pension buyback tax benefits

When you buy back pension service, the amount you pay is treated as a pension contribution and is tax-deductible. However, it also reduces your RRSP contribution room by an equivalent amount (through a Pension Adjustment or Past Service Pension Adjustment).

For Marcus, his $28,400 buyback would:

• Generate a tax deduction worth approximately $8,500-$11,360 (at a 30-40% marginal rate)
• Reduce his lifetime RRSP room by approximately $28,400
• The net after-tax cost of the buyback is effectively $17,000-$20,000

That’s a significant difference. The government is essentially subsidizing your buyback through the tax deduction.

Investing in XEQT tax benefits

If you invest $30,000 in XEQT in a TFSA:

• No tax deduction for the contribution
• All growth is completely tax-free
• All withdrawals are completely tax-free
• No impact on RRSP room

If you invest $30,000 in XEQT in an RRSP:

• You get a similar tax deduction as the buyback
• Growth is tax-sheltered
• Withdrawals are taxed as income in retirement
• Uses $30,000 of RRSP room

The tax comparison

Here’s the key insight: if you have available TFSA room, investing in XEQT in your TFSA may be more tax-efficient than the pension buyback, because the buyback income will be taxed as pension income in retirement, while TFSA withdrawals are tax-free.

But if your TFSA is already maxed and you’d be investing in an RRSP anyway, the tax treatment is roughly equivalent – both give you a deduction now and taxable income later. In that case, the buyback’s guaranteed, indexed income becomes much more attractive compared to the uncertainty of market returns.

6. When the Pension Buyback Wins

Let me be clear: the pension buyback is an excellent deal in many situations. The guaranteed, indexed, lifetime income that a DB pension provides is something you literally cannot buy on the open market at anywhere near the same price. Insurance companies would charge you far more for an equivalent annuity.

Here are the situations where the buyback is almost certainly the right call:

You’re close to retirement (within 10-15 years)

The closer you are to collecting the pension, the less time XEQT has to compound, and the more valuable the guaranteed pension income becomes. A 50-year-old buying back 3 years of service starts collecting in just 10 years. XEQT doesn’t have enough runway to build a decisive advantage.

You plan to stay in the public service until retirement

The buyback only pays off if you actually collect the pension. If you’re committed to your career and plan to hit your retirement date, the buyback is a slam dunk.

You’re worried about longevity risk

If your family has a history of living into their 90s, the pension buyback is extraordinarily valuable. A pension that pays from age 60 to 95 delivers 35 years of indexed income. No portfolio can match that guarantee with zero depletion risk.

You value certainty over potential upside

There’s a deep psychological comfort in knowing that your retirement income is locked in and not subject to market crashes, sequence-of-returns risk, or your own behavioral mistakes.

Your spouse will need survivor benefits

DB pensions typically provide 50-60% of your pension to your surviving spouse for their lifetime – an incredibly valuable form of built-in life insurance.

The cost is based on single-rate contributions (not actuarial value)

If you’re within the election window where the buyback is priced at “single contributions plus interest” rather than full actuarial value, do it immediately. The single-rate price is almost always a bargain.

7. When XEQT Wins

Now let’s talk about where skipping the buyback and investing in XEQT makes more sense.

You’re young with 25+ years until retirement

At age 30, $30,000 invested in XEQT has an enormous runway. At 7% annual returns over 30 years, it grows to approximately $228,000. At 8%, it becomes $302,000. At 9%, it reaches $398,000. The power of compound returns over a long time horizon is the single strongest argument for XEQT over the buyback.

And here’s the thing most people miss: if you invest in a TFSA, all that growth is tax-free. The pension income is fully taxable. After adjusting for taxes, XEQT-in-TFSA could deliver more spendable retirement income than the buyback.

You’re not sure you’ll stay in the public service

This is the biggest risk factor for the buyback. If you leave before you’re eligible for an unreduced pension, you may receive a deferred pension that doesn’t start until 65, or a transfer value that could be less than what you paid. Meanwhile, your XEQT portfolio goes wherever you go, no questions asked.

You already have strong pension coverage

If you’ve been contributing for 15-20 years and the buyback adds only 1-2 years, the marginal benefit is small. At that point, building a liquid XEQT portfolio gives you something your pension can’t: money you can access before age 60, on your own terms.

You need flexibility and liquidity

Pensions are rigid. You can’t take a partial withdrawal to fund a sabbatical, help your kid with a down payment, or cover an emergency. An XEQT portfolio in a TFSA gives you that flexibility.

You want to leave a legacy

When you die, your pension stops (or a reduced survivor benefit continues for your spouse). Your XEQT portfolio passes in full to your beneficiaries – and in a TFSA, it passes tax-free.

The buyback cost is actuarial (and expensive)

If the buyback quote comes back at full actuarial value – especially for service from many years ago – the cost-benefit math shifts toward XEQT. When the price is $40,000-$50,000 for 2-3 years of service, XEQT has a real shot at outperforming, especially for younger workers.

8. The Hybrid Approach: Buy Back Some Service AND Invest in XEQT

Here’s what I told Marcus, and it’s what I’d tell most people in his situation: you don’t have to choose one or the other.

If the buyback cost is $30,000 and you have $45,000 available, consider this approach:

Step 1: Check the election window

If the buyback is priced at single-rate contributions (not actuarial value), buy back as much service as you can at that rate. It’s like getting a guaranteed, inflation-indexed annuity at a deep discount.

Step 2: Prioritize your TFSA

Invest whatever money is left after the buyback in XEQT inside your TFSA. This gives you tax-free growth, flexibility, and liquidity that your pension can’t provide.

Step 3: Use the tax refund from the buyback

The buyback generates a tax deduction. When you get your refund, invest that in XEQT too. For a $30,000 buyback at a 33% marginal rate, that’s a $10,000 refund going straight into your TFSA.

The hybrid math

Using Marcus’s numbers:

• Buyback: $28,400 for 14 months of service, generating ~$3,800/year in additional pension income for life
• Tax refund invested in XEQT (TFSA): ~$9,500 (at 33% marginal rate)
• $9,500 in XEQT at 7% for 28 years: ~$63,000 at retirement

So Marcus gets both the $3,800/year guaranteed pension bump and a $63,000 TFSA portfolio – funded entirely by the tax refund from the buyback itself. That’s not bad for a single financial decision.

Who the hybrid approach works for

• You have enough cash to cover the buyback and continue investing
• You want guaranteed pension income but also want liquid, flexible investments
• You’re moderately confident you’ll stay in the public service but want a hedge
• You want to maximize the tax benefit by reinvesting the buyback deduction

9. How to Make the Decision: A Practical Framework

If you’ve made it this far, you have all the information. Now let’s distill it into a decision framework you can actually use.

Ask yourself these five questions

1. How long until I retire from the public service?

• Less than 15 years: pension buyback strongly favoured
• 15-25 years: either option works; consider the hybrid approach
• 25+ years: XEQT has a strong case, especially in a TFSA

2. How confident am I that I’ll stay in the public service?

• Very confident (90%+): buyback is excellent
• Moderate (60-80%): hybrid approach, or lean toward XEQT
• Uncertain (below 60%): XEQT is safer

3. What’s the buyback pricing – single-rate or actuarial?

• Single-rate contributions plus interest: buy it. Full stop. This is almost always a bargain.
• Full actuarial value: run the numbers carefully; the deal is less clear-cut

4. Do I have TFSA room available?

• Yes: XEQT in TFSA is very compelling (tax-free growth vs. taxable pension income)
• No, TFSA is maxed: the tax argument weakens; buyback becomes more attractive

5. What does my overall retirement picture look like?

• Already have 20+ years of pensionable service: you probably don’t need the buyback; diversify with XEQT
• Early in your career with few years of service: the buyback adds proportionally more to your pension and may be worth prioritizing

Practical next steps

1. Request your personalized buyback quote. Contact your pension centre and get the exact cost, payment options, and election deadline.

2. Calculate the pension increase. Use the formula: 2% x years being bought x expected best-5 salary.

3. Run the XEQT comparison. Take the buyback cost, assume 7% returns, and project it to your retirement date.

4. Factor in taxes. If you have TFSA room, the XEQT option gets a significant tax advantage. If you’d be investing in a non-registered account, the buyback is more attractive.

5. Consider the payment plan. Many plans let you pay in instalments through payroll deduction, letting you continue investing in XEQT simultaneously.

6. Talk to your pension administrator. Every plan has specific rules. Don’t rely on general advice – get the details for your situation.

10. Common Questions

Can I pay for the buyback in instalments?

Yes, most plans allow payroll deductions over a period matching the service being bought back. However, interest accrues on the unpaid balance, so the total cost is higher than a lump sum.

What happens to my buyback if I leave the public service?

The bought-back service is treated like any other pensionable service. If you leave and take a transfer value, it’s included. If you take a deferred pension, it increases that pension. You don’t “lose” the buyback, but you might not get the full value if you were counting on an unreduced pension at 60.

Can I buy back service from a private sector job?

Generally, no. Most plans only recognize prior public sector service or specific approved service types. However, some plans allow buybacks of approved leave, self-funded leave, or education leave periods.

Is the pension buyback better than contributing to my RRSP?

For workers who will stay until retirement, the buyback is usually better than an equivalent RRSP contribution because the pension provides a guaranteed, indexed, lifetime annuity – something you’d have to buy on the open market at much higher cost. But both use the same tax room (the PSPA reduces RRSP room), so you’re not truly choosing between them in a tax sense.

What if my pension plan changes or gets reduced?

While Canadian public sector pensions have historically been very well protected and most major plans are well-funded, there’s always some political and fiscal risk. That said, DB obligations are legal commitments, and significant reductions to accrued benefits would be unprecedented in Canada.

11. Final Verdict

So what did Marcus do?

He bought back the service. All 14 months. He paid the $28,400 out of savings, took the tax deduction, and invested the $9,400 refund in XEQT in his TFSA the following spring.

I think he made the right call. Here’s why:

For Marcus specifically, the buyback was priced at a reasonable rate because he elected within a couple of years of becoming eligible. He’s committed to the public service – he loves his team, his work-life balance, and his pension. He plans to work until 60. And the guaranteed $3,800/year in indexed pension income, starting at 60 and lasting the rest of his life, is worth far more to him than the possibility of a larger XEQT portfolio.

But that’s Marcus. Your situation might be completely different.

If you’re 28, unsure about your career path, and have a full TFSA to fill, investing in XEQT gives you flexibility, tax-free growth, and decades of compounding that can potentially outperform the buyback. The math works in your favour, and so does the optionality.

If you’re 48, deeply embedded in the public service, and counting down to retirement, the buyback is almost certainly the best financial decision you can make. The guaranteed income, the inflation indexing, the survivor benefits – no equity portfolio can replicate that with the same level of certainty.

And if you’re somewhere in between, the hybrid approach – buy back what’s cheaply priced, invest the rest in XEQT, and funnel the tax refund into your TFSA – gives you the best of both worlds.

The single most important thing is to not let this decision sit on your desk for three years while you overthink it. Buyback costs go up with time. Investment returns are lost while cash sits idle. Whether you choose the pension, XEQT, or both – make the decision, execute it, and get back to the work and life that actually matter.

Your future retired self – the one collecting that pension cheque, or watching their XEQT portfolio grow, or ideally both – will thank you.