Defined Benefit Pension Plans

Welcome » Retirement » Private Pension Plans » Defined Benefit Pension Plans

Employees often prefer Defined Benefit pension plans over Defined Contribution because risks are transferred to their employers.

Pension Adjustment = 9 x Pension Entitlement - $600
employees know precisely their contributions and pension benefits
employer bears investment risk à doesn’t know its costs
contributions determined by an actuary and adjusted (e.g., every three years)
types:
- flat benefit
- career average earnings
- final average earnings
- best earnings

Maximum yearly pension = min{$2,000 (2005) per year of pensionable service (YOPS), 2% × YOPS × avg of best 3 consecutive years of earnings}

The maximum yearly pension is the minimum of

$2,000 (in 2005) per year of pensionable service (YOPS), and
2% × YOPS × avg of best 3 consecutive years of earnings

employees know the exact amount of their own contributions and their plan benefits
employers don't know the amount of their contributions since the capital needed depends upon investment returns during the accumulation phase
- large potential liability for employer since the employer must provide adequate funding for the promised future benefits
upon retirement, funds can
- buy a life annuity
- be transferred to a LIRA or LIF
four formulas for determining benefits
1. best earnings
2. final average earnings
3. career average earnings
4. flat benefit
past service benefits may be available for service with employer before the pension plan was implemented
- employer funded only → reduced benefit ( e.g., 1% per year of pensionable service versus 2%)

The content is meant to be accurate when written. Be sure to use your judgment and consider consulting your advisors for help with your specific situation. Please send suggestions and corrections to info@riscario.com. Better still, why don't you or your advisors volunteer to make this wiki better?
Copyright, Taxevity, 2006 - 2011

thirtyseven.ca