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  5. Types of Employer-based Pension Plans
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  5. Types of Employer-based Pension Plans

Types of Employer Sponsored Pension Plans

Defined Benefit Plan (DB Plan)

This is a plan in which the retirement benefits for members are predetermined. Actuaries calculate the level of contribution that is required to finance the promised benefit and the employer puts the money in a trust fund for the members benefit. Employers invest the pension money as they see fit and attempt to earn sufficient returns to minimize their contributions without jeopardizing the security of benefits. Funding shortfalls are the responsibility of the employer.

Defined Contribution Plan (DC Plan)

This is a registered plan in which a specific amount of contribution is required by the employer and the employee (if the plan is contributory) and no withdrawals are permitted during the employee’s working life. Because this plan is registered with the regulator there are pension rules which must be adhered to.

o   The contributions are deposited, as required, into an account set up in the member’s name, held by the financial agency appointed to hold and administer it. Members may have a choice with respect to the type of investments made with the contributions. The accumulating contributions and investment gains/losses are credited to the members account.

o   At retirement, termination, disability or death, the accumulated amount in the members account is determined. On termination or retirement the value of the contributions and investment income must eventually be used to provide the lifetime retirement income. The level of retirement income will depend on the available money, the interest rates and terms of the financial plan (for example an annuity or retirement income fund) purchased at retirement.

 

Hybrid Plan

This plan funds one half of the required retirement benefit through a DB portion of the plan and the other half through a DC portion of the plan. This plan shares the risk between the employee and the employer. Funding shortfalls in the DB portion are the responsibility of the employer. In the DC portion the level of retirement income will depend on the available money, the interest rates and terms of the financial plan (for example an annuity or retirement income fund) purchased at retirement.

 

Targeted Benefit Plan

This is a plan that has elements of both the defined benefit and defined contribution plans. The contributions are determined as if the plan were a defined benefit plan. This requires the use of actuarial assumptions of interest rates, salary growth and mortality. A target benefit plan, like a defined contribution plan shifts investment risk to the plan participants because it is only obligated to pay whatever benefit can be provided by the amount in the contributors account.

 o   CWIPP – Canada Wide Industrial Pension Plan

CWIPPis a multi-employer Targeted Benefit Plan. The plan was set up in 1970 for employees of companies whose unions have an affiliation with the Canadian Labour Congress (CLC). CWIPP was designed specifically with small and medium-sized employers in mind. As a result, it offers employers the advantages of low-cost centralized administration and professional investment management. Each group within CWIPP has its own funding status no cross-subsidization. It also offers members several important advantages, such as early retirement features, portability, and survivor benefits.

This is a target-benefit, multi-employer pension plan. At January 31, 2013 it had 437 contributing employers, almost 50,000 active and deferred members, about 6,292 retirees and assets of more than $1 billion. The NHRIPP is now the standard pension plan for the nursing and retirement home industry in Ontario. The NHRIPP’s membership is comprised of employees of the nursing and retirement home industry. Unlike most multi-employer pension plans, the Trustees of the NHRIPP are all appointed by the unions which represent Plan members in collective bargaining. The Plan’s assets are held in trust by a Board of Trustees in accordance with the terms of the NHRIPP Agreement and Declaration of Trust.

  

Group Registered Retirement Savings Plan (Group RRSP)

This is simply a collection of individual RRSP contracts administered collectively by the employer for an employee group. Employers usually offer payroll deduction and remit the contributions to the plan issuer. Employers may contribute but any employer contribution is considered taxable employment income to the employee. The contribution maybe tax deductible for the employee as an RRSP contribution.

 

Deferred Profit Sharing Plan (DPSP)

This is an employer-sponsored profit sharing plan that is registered with the Canadian Revenue Agency. Periodically, the employer allocates a share of the profits to all participating employees and places it in a trust account. Employee contributions to this plan are not allowed except for direct transfers from other registered tax-assisted plans. Taxation of the employee’s share of the profits and the interest accrued in the trust fund is deferred until the employee is in receipt of these moneys. Although a DPSP may have some of the same characteristics of a pension plan, it does have some important differences. A DPSP may allow for withdrawal of all or part of an employee’s account (including the vested employer share) while still in active employment. This is not allowed under a pension plan. At termination or retirement, lump-sum payments out of a DPSP are similarly taxed as income, but may be tax-sheltered by the purchase of an annuity or a transfer to an individual RRSP. This payment in a lump sum is not normally available at termination or retirement under a pension plan.

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