| Pension plans can be broadly categorised as either | | | | defined benefit plan. Unlike defined contribution |
| 'defined benefit' or 'defined contribution' plans. A | | | | plans, the benefits that employees receive are |
| pension plan is merely one form of retirement | | | | not indexed to fund performance. Incidentally, the |
| plan. They are essentially employer-sponsored | | | | company or employer is responsible for funding |
| retirement instruments. The defined benefit and | | | | the plan, determining investment risk undertaken |
| defined contribution plans are similar only up to | | | | and managing the portfolio. The employer has a |
| that point, however. | | | | duty to fund any shortfall at the expense of the |
| Defined benefit (DB) plans are pension plans that | | | | company as a result. |
| calculate the pension benefits that an employee | | | | Defined benefit plans can also be qualified or |
| receives from an employer on the basis of a | | | | unqualified. Qualified DB plans offer tax incentives |
| specified formula. The benefits that you receive | | | | to the beneficiary of the plan. Also, the employer |
| under this plan are typically dependent on your | | | | can claim for tax benefits for contributions made |
| salary (pre-retirement income or average salary), | | | | to finance employee benefits. |
| as well as your length of service with the | | | | In recent times, there has been a shift away |
| company. | | | | from the defined benefit plans to defined |
| DB plans are different from defined contribution | | | | contribution plans. As a concept, the defined |
| plans in that they are 100% employer-sponsored. | | | | benefit plan is a significant liability to companies |
| All you need to do is work hard and long and the | | | | who are obligated to pay an employee's benefit |
| company will reward you for years of service and | | | | for the duration of their retirement. |
| competence with a lumpsum and income for | | | | Also, many baby boomers- who comprise a |
| retirement. The burden of funding this pension | | | | significant segment of the working population- are |
| plan is squarely on the shoulders of the employer. | | | | close to retirement. That reality renders the |
| It is for this reason that such plans are associated | | | | concept of the defined benefit plan more |
| with corporations and state employers. | | | | burdensome. Some employers have responded |
| The formula used for calculating the retirement | | | | by ceasing contributions or allowing early |
| benefits from a DB plan is at the discretion of the | | | | withdrawal of funds by employees. |
| employer. The maximum benefit for employees is | | | | Choosing an employer with a defined-benefit plan |
| regulated by pension laws and may also have | | | | is somewhat risky, since it is likely that you will be |
| employer-defined limits as well. For instance, one | | | | left to develop your own income stream once the |
| employer offers employees- who worked for a | | | | plan is terminated. Some companies have stopped |
| minimum of 33.33 years - a lumpsum that is ten | | | | their defined benefit plan and offered their |
| times their monthly pre-retirement income and a | | | | employees lumpsum benefits from it. Though |
| monthly pension equal to half of their last salary | | | | defined contribution plans involve greater |
| upon retirement. Other formulae may state that | | | | uncertainty, they are preferred by employers |
| the employee will receive a certain percentage of | | | | since they operate on the basis of contributions. |
| their pre-retirement income (2%) for every year | | | | Defined benefit plans offer more security but |
| that they worked. | | | | they are becoming less favourable to employers, |
| Employers will usually have a pension fund that is | | | | particularly after the economic downturn of 2008. |
| devoted to funding employee pensions under the | | | | |