Employee Retirement & Savings:
Defined Benefits Plan
A Defined Benefits Plan is a pension plan based on your highest average salary, as well as the number of years of your pensionable service. Both employers and employees make regular contributions to the plan, so it is financed by these contributions as well as by investment earnings.
Why do I need a Defined Benefits Plan?
A Defined Benefits Plan allows employees to plan for retirement better, since they can estimate their future income in relation to their salary. This ensures a pre-defined lifetime income. Upon retirement, the employee receives the specified monthly income for the rest of their life. Some plans also allow payments to continue to the employee’s spouse or common law partner and even allow for inflation adjustment.
Why should I offer a Defined Benefits Plan to my employees?
Offering a Defined Benefits Plan to employees is beneficial, providing a value-added incentive in attracting and retaining employees. It provides employees with the security of a regular retirement income and serves as an excellent method for employees to develop a retirement plan that suits their lifestyle and their family’s needs. Additionally, some Defined Benefits Plans offer early retirement provisions that encourage employees to retire early (before the age of 65).
Types of Defined Benefits Plans:
Defined Benefits Plans can either be funded or unfunded. In an unfunded plan, benefits are paid for by the employer (or other pension sponsor) as and when they are paid, and no assets are set aside. In a funded plan, contributions are invested into a fund. Future returns on the investments, as well as the future benefits to be paid, are not known ahead of time, and therefore there is no guarantee that it will be enough to satisfy the promised pension amount. Typically, the employer assumes the investment risk and investment reward, topping up the accumulated funds so that this does not affect the individual plan members.