How well do you know about your pension plan?
There’s a lot of talk in the news these days about how more and more pensions are defined contribution plans, but the differences between defined contribution and defined benefit plans are not always explained, even though they are crucial to your retirement planning.
Charles de Kovachich: Portfolio Manager
Supplementary pension plans offered by employers represent a major benefit for their employees as they provide a supplementary source of retirement income. There are two main types of supplemental plans: DB (defined benefit) pension plans and DC (defined contribution) pension plans.
DB pension plans are usually preferred by workers. The advantage with this type of plan is that the amount of the retirement annuity that will be paid to each employee can be determined in advance. Employees contribute to the plan based on their salary and the employer pays the difference. The contributions paid into the plan are reassessed on a regular basis by an actuary. However, if the fund's assets are insufficient for paying the annuities expected under the plan, it is the employer who has to make up the difference.
As for DC pension plans, the contributions paid by the employer and, if applicable, by the employee are determined ahead of time. However, the retirement benefit amount cannot be known, as it depends in large part on the return on the plan's investments. In other words, it is the employee who assumes the risks associated with investment returns as he or she does not know the amount of retirement benefits to be received.
If your employer's retirement plan is a defined contribution plan, you will need to take extra care when developing and monitoring your retirement plan. Since you do not know the exact amount you'll receive upon retirement, you may need to set aside additional funds in order to ensure you'll have enough to maintain your standard of living after retirement.
Having an employer pension plan puts you ahead of the game in terms of accumulating funds for your retirement. However, you still need to make sure that this income will be enough to maintain your standard of living once you leave the workplace. Lean on your advisor to help make the necessary calculations and adjust your retirement plan accordingly.
Charles de Kovachich
National Bank Financial