The pinnacle of employee benefits packages is a well designed and structured group pension plan. Typically pension plans are set up by companies that have reached stability and want to provide their employees with long-term financial benefit both during their term of employment and into retirement.
While there are a lot of considerations that go into the design of a particular plan and the various options selected for it, the most significant choice is whether you wish to structure your program as a Defined Contribution Plan or a Defined Benefit plan.
There are pros and cons to each but don’t worry. RPP Benefits team of experts will take the time to walk you through it and select the best option for your company and employees based on your needs, desires and constraints.
With a Defined Contribution Plan, the payable amount is defined by the total contributions and investment earnings made over the lifetime of the contributor. Other than defining the percentage of contributions which will be made by the employer and employee, the contract does not include a formula for a final pension.
A Defined Contribution plan is ideal for small business operations because the cost of providing the benefit is controlled by the plan design and is predictable for budgeting purposes. When an employee retires, no top-up payment is required because there is no promise to pay a pre-determined pension benefit.
To set up a plan, the Plan Sponsor decides how much (as a percentage of salary) will be contributed on behalf of each employee, whether employees must participate (and at what percentage of earnings) and whether employee participation should be voluntary or compulsory.
The Pension Income available from a Defined Benefit Pension is defined by a formula written unto the plan design. A typical formula is based on earnings over the employee’s length of service in your business, often with an emphasis on the last few years of earnings, combined with a defined percentage entitlement based on those years of service.
An example might be as follows: credit of 1.5% per year of duty, based on the average of the best five years of the employee’s last ten years of employment.
Employers and employees make regular contributions, usually calculated as a percentage of the employee’s earnings. The pension at retirement does not depend on the investment income over the plan’s lifetime nor the total funds accumulated. Rather, it is based on actuarial evaluations. In some cases, the employer must ‘top-up’ the collected funds to an amount which will be sufficient to generate the pension promised by the formula.
For these reasons a defined benefit plan is not a viable alternative for small businesses. Cash reserves must be set aside to fund any significant top-ups required to fund the promised pension payments. Furthermore, actuarial assessments are required every three years to ensure the plan has adequate reserves. These assessments add to the cost of plan administration and make such a plan undesirable for smaller companies who can not spread the costs over a large body of employees.
There is some annual reporting required for both types of Pension Plans, but the Defined Contribution Plan requires little or no actuarial intervention. The legislation for plans is provincial unless your business is subject to Pension Benefits & Standards Act (PBSA) legislation, which overrides the provincial legislation.
A properly-designed employee benefit plan can be a powerful tool to satisfy the need for cost containment and at the same time provide employee satisfaction and retention. Click here to find out more about the benefits available.
Benefits continue to be, for the most part, tax-free rewards and incentives you can offer employees. To find out how benefits are currently taxed: click here to find out more.