Defined Contribution vs Defined Benefit
A Company Pension. (Occupational Pension Scheme (OPS)
This is a pension plan provided by an employer for its employees. It is a tax-efficient way for you to help ensure your employees are financially secure in retirement as it offers employees the opportunity to avail of tax-reliefs against contributions. Company Pensions are usually either trust Based or Contract-Based (PRSA). These plans are beneficial for employers and employees as an employer, providing a Company Pension Plan to your employees will help attract new staff and retain existing employees. Employees benefit from an employer contribution to their fund in addition to their personal contribution
Occupational pension Scheme (company pensions) in Ireland can generally be described as either defined benefit or defined contribution. (DB or DC)
Defined Benefit (DB) schemes
Defined benefit schemes aim to provide a set level of pension and/or lump sum at retirement. The level of benefits depends on your service in the scheme and salary at retirement. Generally, DB schemes in the private sector aim to provide employees with a pension of 1/60th of salary for every year of service to a maximum of 40/60ths. You may have the option to take a retirement lump sum and a reduced pension. Public sector schemes tend to provide retirement lump sums of 3/80ths of salary and a pension of 1/80th of salary for every year of service to a maximum of 40 years service. Essentially the employer is taking all the risk as they are defining the pension income in retirement, regardless of how the fund performs.
Defined Contribution (DC) scheme
In a defined contribution scheme your employee contribution and the contribution paid by your employer are usually fixed as a percentage of salary. The contributions will be invested in a fund in order to provide your retirement benefits. DC schemes do not provide any guarantees; your benefits at retirement will depend on a number of different factors including contribution levels, fund performance, plan charges and the annuity rates available when you retire. Essentially the employee is taking all the risk as the pension income in retirement is based on the fund performance of the pension investment manager.
A lot of Employers offer DB pensions to staff are reviewing as the cost of these pensions is very high, and some are struggling with funding issues to meet potential liabilities. In a lot of cases, the employers are winding up the scheme as they cannot afford to meet the funding standard. It’s worth noting that some members of DB schemes may feel that despite the underfunding of their DB scheme it will still pay the full benefits.
The Funding Standard is a set of regulations that require funded defined benefit pension schemes to build up and maintain enough funds to pay members their pension entitlements were the fund to be wound up. At least every three years the actuary must prepare an actuarial funding certificate (AFC) and submit this to the Pensions Authority.
An AFC indicates whether or not a pension scheme can meet all liabilities that have been accrued by members to the effective date of the certificate, was it to wind up at that date. These liabilities include the pensions payable to existing pensioners, the benefits payable to deferred members (people who have left service) when they reach retirement age, and the accrued benefits payable to active members assuming they left service at the effective date.
The scheme also needs to hold a risk reserve to allow for adverse future experience relating to the scheme’s assets and/or liabilities. The actuary must submit a funding standard reserve certificate (FSRC) to the Pensions Authority which indicates whether or not the scheme can meet this additional reserve.
Group PRSA Pensions
Many Group Pensions are trust-based arrangements. A Group PRSA (Personal Retirement Savings Account) is different from a Group Pension because Group PRSAs are individually-owned contracts. You and your employers can avail of tax-reliefs against contributions and the pension plan does not require trustees. However, if you are paying into a Personal Retirement Savings Account (PRSA), your employer does not have to make a contribution
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