defined benefit v defined contribution

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aidank

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was having a discussion with a work collegue at lunchtime, pension came up for a brief second

the company we work for transitioned from defined contribution to a defined benefit scheme ~3.5 yrs ago, he was saying that this works out much better for a company as if you leave they have to pay you out less than they would if you had a defined contribution pension

he was also saying it works out better for you if you stay until the bitter end (>30yrs in both our cases)

very curious on this one?

thanks,
aidan
 
Are you sure the transition was not the other way around? Most employers are going DC, where the risk is with the employee, not the company.

A defined benefit gives defined benefits on retirement - often 2/3rds final salary at full service. Generally both companies and employees pay for this; however in recent years, as there is a guarantee of a defined benefit, companies either have had to increase the contributions or pull out of the schemes.

Defined contribution on the other hand simply buys a pension based on the value built up in the fund at the time of retirement. Again employers contribute on occasion; however they are not compelled to as in the DB example.

With reference to leaving, I'm not sure that this has any relevance at all.
 
100% sure on the transition FROM defined contribution TO defined benefit

3.5yrs ago plenty work going so we thought change was made so that people particularly older people would not be tempted to leave
 
aidank said:
the company we work for transitioned from defined contribution to a defined benefit scheme ~3.5 yrs ago, he was saying that this works out much better for a company as if you leave they have to pay you out less than they would if you had a defined contribution pension

he was also saying it works out better for you if you stay until the bitter end (>30yrs in both our cases)
Click to expand...

It is rarely true that a DB pension will cost the employer less.
In a DC pension, the employer contibutes a set percentage and that's it. If the stock market tanks, and the pension plan drops in value, the employer has no responsibility.

In a DB pension, the employer is responsible for putting in as much as it takes to make up the promised pension. This can cost a lot, as can be seen in the number of under funded pension schemes at the moment.

Your friend is commenting on what happens if you leave a company before
retirement.

If you leave a DB pension, you can leave your pension there, until retriement, so the company is still responsible.

If you transfer your pension, the transfer value would be dependent on your years of service, and the number of pension fund units that this would buy would again be dependent on the current value of equities so might
be a good value or a bad one.

So, as far as I can tell, the company does not gain by people leaving
DB pensions early.

Anyone else think this makes sense ?
 
A company running a DB scheme could gain by people leaving early as they would have been accruing for future salary increases. If a leaver takes a transfer to a new scheme or to a buy out bond, the transfer value would be less than what was accrued.
I can't see this as been a significant enough reason for moving from a DC to a DB though and in the case of a new scheme there would be very little build up of accrued service after 3.5 yrs anyway
 
aidank said:
100% sure on the transition FROM defined contribution TO defined benefit
Click to expand...

I too am amazed that it's this way around?

In relation to getting the benefits from a defined benefits pension and older people. If it's later in their career they won't have much time to build up the years so it doesn't make sense.
 
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