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Defined Benefit |
Defined Contribution |
The DB Advantage |
| Philosophy |
To reward members for long service with a lifetime retirement income. |
To help members accumulate retirement savings during their active career. |
The security of income rather than savings. |
| Contributions |
Typically, members and employers contribute a set percentage of the member's salary. Funds are deposited in a pension fund for the benefit of all Plan members. |
Typically, members and employers contribute a set percentage of the member's salary. Funds are deposited in a personal account set up in the member's name. |
In most DB plans, employers shoulder the investment risk. Under a DC plan, members take on all the investment risk. |
| Investment Decisions |
Professional money managers make the investment decisions based on strict guidelines established for the Plan as a whole. |
Members have to decide how their money is invested, usually based on a range of available investment options. |
With a DB plan, members don't have to worry about making investment decisions or tracking investments because a highly qualified investment professional is doing it for them. |
| Income at retirement |
Retirement income is a percentage of the member's pre-retirement earnings - so the more service the member has, the bigger that percentage will be. Once members start receiving their pension, they receive it for life. |
The money in the member's account is used to buy a lifetime annuity (an income stream). The size of that income will depend on various factors such as how much the member has contributed, the success of the investment strategy, and interest rates when the member buys an annuity. |
With a DB plan, members can estimate, in advance, what their pension will be. Benefits are pre-defined - members know what they are going to receive. |
| Ancillary benefits |
Many DB plans, offer ancillary benefits such as:
- inflation protection
- enhanced early retirement benefits
- disability benefits
- survivor benefits
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At retirement, members may be able to buy a lifetime annuity that includes some ancillary benefits such as inflation protection - but these extras tend to be expensive, which reduces the amount they'll have available to provide an income stream. |
With a DB plan, the ancillary benefits are built in and members don't have to worry about the additional cost of shopping around for an annuity that includes them. |
