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What are Defined Benefit Pension Plans?

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Financial Planning   ->   Pensions   ->   Registered Pension Plans (RPPs)   ->   Defined Benefit Pension Plans - What are they?

Defined Benefit Pension Plans

Registered pension plans (RPPs), which are regulated by either federal or provincial legislation, are either Defined Benefit Pension Plans or Defined Contribution Pension Plans.  With a defined benefit plan, the employees know in advance what their pension will be when they retire.  The company makes contributions to the plan based on actuarial calculations of what contributions are necessary to fund current and future pensions.  The plan funds are invested, and the company must make higher contributions if the investments perform poorly.

With defined benefit pension plans there is some risk to the employee, because these plans are never funded enough that 100% of current and future pension obligations can be covered.  If the company becomes insolvent, employees may not get their full pension. 

If an employee leaves their job prior to retirement, a pension lump sum (commuted value) can be transferred to a locked-in RRSP, or in many cases can be taken as a deferred pension.  If the lump sum goes to a locked-in RRSP, withdrawals cannot usually be made until the employee is within 10 years of retirement age.  If the employee is already within 10 years of retirement, then the funds can probably be used to purchase a locked-in Registered Retirement Income Fund, also called a Life Income Fund (LIF), or Locked-in Retirement Income Fund (LRIF).   The age at which the employee can access the locked-in RRSP is usually determined by referring to the original pension plan.

See Characteristics of Defined Benefit Pension Plans.

Tax Tip:  Defined Benefit Pension Plans are not necessarily better than Defined Contribution Pension Plans.

Revised: September 20, 2017

 

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