An Insight Into The World of Pension Plans

By Ivon T Hughes
insights on pension plans
Figure 1. Insights on Pension Plans

Types of Pension Plans

Practically speaking, there are 2 types of pensions - defined-benefit plans and defined-contribution plans.

  1. Defined-contribution plans are the easier of the two (as well as the more common now). In this plan, the amount of money contributed by the firm is a part of what the worker receives. With this type of plan, the value of the worker's pension is dependent on the performance of the investments made by the firm. Therefore the eventual advantage to the worker is uncertain.
  2. Defined-benefit plans set the amount of money a person will get after retirement, no matter how the investments go. In a defined-benefit plan, the firm is bound to pay even if the investments made by the firm don't perform. This is among the principal reasons why these plans are becoming a thing of the past. Although some organizations are keeping their defined-benefit plans, many companies have frozen this kind of pension fund, keeping them restricted to only those that are already enrolled.

The Employee Perspective

Today, one might question just how important pensions are for a worker - many Canadian and Americans don't have pensions (either because they are self-employed or because their companies don't offer them). With a social security system, many people are relying entirely on self directed retirement programs. Despite the fact that there are many who retired with pensions, a growing number of people have seen their plans collapse as their companies end up going bankrupt.

If you are able to join your employer’s pension plan, it compounds its power with contributions from the employer. Recent laws have ensured better protection for the pensions. These laws were made after leading pension collapses that took place in the '90s. Nevertheless, having a pension isn't a justification to avoid saving cash for retirement. Even those fortunate few with pensions should hold separate retirement accounts.

The Company Perspective

When firms sponsor a pension plan for their workers, they may be basically making an unofficial statement about how important their workers are for them. Although a lot of CEOs justify restricting pensions by citing their responsibilities to investors, providing acceptable retirement planning is normally in an organization's best interests. There are many tax benefits for companies where a certain percentage of workers enroll in the plan. This can help guarantee that the plan is really for retirement, and not simply an empty offering.

Nevertheless, pensions can also be expensive to businesses. For example, the Pension Benefit Obligation (PBO) - the current-valued dollar value a business estimates it'll need to fulfill its pension obligations - doesn't have to be reported on the books of the company.

The PBO is determined by actuaries using complex mathematical calculations that only a mathematics major could love. It's only natural that lots of people run for cover when confronted with having to decipher a pension strategy's fiscal mechanics.

A Pension and You

A pension is supposed to provide you with a livable income in post retirement years. Pension plans offer you monetary security in times when your professional income starts to recede, allowing you to live without lessening your standards of living. One must make proper evaluation of finances and understand that starting retirement planning at an early age makes more sense than doing it at the later stage of life. Starting pension planning in early stages of your life is even easier as you've less duties and obligations to handle. Additionally, you will be able to reap compounding benefits for more time, thus, your future could be more secure.

While other retirement choices could be a great fit - especially in cases where you have planned enough - having your money professionally managed in a stable, organized pension can create a substantial difference later on. Whether you are planning to move to Florida or moving to your New England cottage, your retirement ought to be something to look forward to. It should not be all about financial uncertainties and doubts. While retirement alternatives are ever-evolving, knowing how your pension works will surely help make your retirement more worry free.

Phil Barker

About the Author

Phil Barker

Phil Barker is a leading expert on life annuities in Canada. has different financial products and has been a recognized authority since 1972.

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