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A defined benefit plan is the first type of plan. It was negotiated by a workers' and an employer's committee. The employer guarantees that a worker will receive a specified amount as a pension upon retirement (Gottlieb & Whiston, 2013). It is entirely supported by the employer, who contributes a percentage of the employee's earnings to the plan. The plan is funded in a tax-deferred account by the company paying a percentage of the employees' pay. In that regard, it is a non-contributory plan (Gottlieb & Whiston, 2013). The pension formula is calculated by taking the best five annual pays of an employee multiplied by number of years the employee has worked multiplied by an accrual rate. In this case the rate agreed upon was 2.0%. The plan is integrated with CPP, whereby the bridge benefit is offered on early retirement at ages of 55 years up-to 65 years.
In accordance to this plan, an employee eligible for this plan is any worker above the age of 22 that is on a full time employment for at least 24 months. An employee qualifies for a pension if he or she has worked for at least 2 years and has reached the retirement age of 65 years. There is a bridge benefit that allows for early retirement of 60 years with no fines and 55 years with a fine of 0.3%. Early retirements have to be approved by the employer except in situations of ill health.
Pensionable service is thus defined as a period of service after two years of employment. It includes all forms of paid leaves such as illness leave, maternity or parental leaves. However, it does not include unpaid leave or suspension periods. Pensionable earnings thus include the employee's base earnings, overtime, and vacation payment.
The second plan was solely determined by the employer with no input by the employees. This plan is a hybrid plan, as it contains elements of a contributory plan (Gottlieb & Whiston, 2013). A hybrid plan entails the contribution of both the employer and employee, thus, it contains both elements of defined benefit and defined contribution (Conison, 2003). The employer upon retirement offers a lump sum benefit, calculated in terms of percentage of pay. The employer has relative control over cost, and the liabilities are shared between the employer and the employees. This plan is also integrated with the CPP by giving a bridge benefit.
Employee is required to contribute a 5 % earning to a defined contribution account where by the employer matches the contribution on a dollar to dollar basis. The defined benefit is to be calculated as a 2% average earning with the formula of 2% multiplied by annual income multiplied by number of employed years.
Eligible members of the plan are permanent employees aged 22 and above having worked for a minimum of 3 years. A retirement age of 65 years has to be attained so as to receive pension. The plan will integrate government benefits
Pensionable service in this plan is defined as a period of service after three years of employment. It includes paid leaves such as illness leave, maternity or parental leaves, excluding any unpaid leaves. Pensionable services also include the employee's base earnings, overtime, and vacation payment.
Some of the flaws of defined benefit plans include the following:
Perhaps the most problematic aspect of a defined benefit plan is that of inaccurately estimating the employee’s pension benefit obligation. The process of estimating the pension benefit obligation involves the estimation of the present value of a future encumbrance (Ontario Expert Commission on Pensions, 2007). This becomes quite challenging to work with.
The sizes of defined benefit plan assets and liabilities are a large sum.
Off-balance sheet accounting provisions to account for the benefit plans brings in a lot of distortions to a company’s financial statements.
Defined benefit plans are quite cumbersome to budget for.
Third party costs are very high.
However, despite such problems the attractions of defined benefit plan are:
It ensures that an employee enjoys more retirement benefits
It relieves the employee of market fluctuation risks by placing them on the employer
The responsibility of making investment decision is placed on the employers who have more expertise in such sectors
There is involvement of third parties that ensure that there is adequate and optimal investment of retirement plans.
In the pension fund industry public policy and management is a welcomed reprieve for most employers. Public policy should be used to lessen the following issues that employers face in the provision of offering benefit plans. Solvency funding, this is where in the case of insolvency of a firm the benefits are still secured. There is also the issue of risk asymmetry. A major problem is the surplus and under funding of retirement schemes due to inaccuracies in determining contributions. Public policy should also look into the harmonization of pension legislation. Agency costs make keeping up with retirement funds quite expensive. If reduced by public policy then this act will make the administration of better retirement benefits possible (PIAC, 2007).
Indexation should be left to the discretion of the plan sponsor in the case of offsetting inflation. This is because of the availability of too many trade-offs. The indexation also makes a plan more attractive.
The York University Pension Plan is a contributory plan. Members make contributions that are deducted from the employee's salary at a particular ratio. The contributions are tax deductible up-to the annual money pension limit set in the income tax act is reached (York University, 2014).
The Plan is integrated with the Canadian Pension Plan, as the contributions stipulated in the plan are based on a formula that takes into account employees pensionable earnings and the year’s maximum pensionable earnings (YMPE) and are deducted from each pay (York University, 2014 ). This deduction occurs as a percentage for example 4.9% as of March 2014.
The plan specifies a bridge benefit, which is a form of early pension payment due to early retirement. Any individual who retires below the age of 65 can get a bridge benefit if their pension plan includes it. In accordance to York University Pension Plan, the bridge benefit stipulates that the minimum age of retirement is 55. If an employee retires between ages 55 and 60, his or her Minimum Guaranteed Benefit will be reduced by an additional 0.5% per month between their actual retirement date and age 60 (York University, 2014).
A defined contribution component is mentioned in the plan, whereby one can transfer funds at any time prior to termination or retirement(York University, 2014). The funds and integrated with the defined component where by the funds shall attract the same rate of return of York University Pension Plan.
Pensionable service is thus a period of service after 24 months of employment. All earnings are included, except for honoraria, payments for overload teaching and T4. I agree with the plans definitions of pensionable earnings and services. There is no additional input since the definition is all inclusive.
The plan stipulates that early retirement can take place at age of 55, and the employee has to have worked for a minimum of ten years (York University, 2014 . At the age of 60, an employee can retire on a full unreduced pension, therefore, I would require 30 more years of service to be able to have an early retirement on a full un-reduced pension.
The normal form of pension is defined as the usual way the member’s pension will be paid as stipulated in the pension plan. If an employee does not have a spouse at the retirement age, payments will run for a lifetime and cease after the death of the employee. No death benefit shall be paid to the beneficiaries.
Conison, J. (2003). Employment benefits in a nutshell. Eagan, MN: West Pub Co.
Ontario Expert Commission on Pensions. (2007). Reviewing Ontario’s pension system: What are the issues? ONTLA. Retrieved from http://www.ontla.on.ca/library/repository/mon/16000/27056
PIAC. (2007). PIAC Response to Ontario Expert Commission on Pensions. Ontario: PIAC.
Gottlieb, L. & Whiston, B. (2013). Handbook of Canadian benefits plans. Morneau Shepell.
York University. (2014). York university pension plan. York University. Retrieved from http://retire.info.yorku.ca/files/2015/04/York-University-Pension-Plan.pdf
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