Benefit And Defined Contribution Pension Scheme Accounting Essay

Many states have created financess for their citizens and occupants to supply income when they retire or in some instances when they become handicapped. Normally this requires a payment throughout the citizens working life in order to measure up for a benefit later on ( Wikipedia 2013 ) which is known as pension. “ The common usage of the term pension is the payments a individual receives upon retirement, normally under pre-determined legal and/or contractual footings, a receiver of a retirement pension is known as a pensionary or retired person ” ( Wikipedia 2013 ) . This is an appropriate system which offers people a particular income when they are no longer doing a regular income from employment. “ A pension created by an employer for the benefit of an employee normally referred to as occupational or employer pensions which are a signifiers of deferred compensation normally advantageous to employee and employer for revenue enhancement grounds ” ( Wikipedia 2013 ) .

Regularly agreement of retirement programs requires the part of money from both the employer and employee to lodge in a fund during the employee working period so as to have defined benefit upon retirement. Retirement program is classified as defined benefit and defined part in conformity with the finding of such benefit. Defined-benefit program guarantees a certain payment at retirement utilizing a lasting expression which on a regular basis is capable to the employee ‘s wage and the figure of old ages ‘ employees worked. Defined-contribution program will supply a payment at retirement that will depend upon the sum of money contributed and public presentation of the investing made.

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“ In the private sector, defined benefit programs are frequently funded entirely by employer parts, for really little companies with one proprietor and a smattering of younger employees, the concern proprietor by and large receive a high per centum of the benefits ; in the populace sector, defined benefit programs normally require employee parts ” ( Wikipedia 2013 ) , usually these benefits depend upon the nature of organisation and the policies of organisation. “ Employers have used defined benefit program in competitory labour markets to pull and retain skilled employees, defined part programs can non be used to retain long-service workers because their history balances are to the full portable one time vested so they provide workers no inducement to remain with their current employer ” John A. Turner and Genard Hughes ( 2008 ) . Now a yearss, these benefits may confront deficits or surpluss among the sum soon in the investing programs and the entire sum of their pension demands, the employer, the employee or both have to do a part but the investing hazard can be borne to the employer and besides can profit from excesss.

2. A PURPOSE Statement:

2.1 Defined-contribution pension strategies going more of import manner of investing.

Defined part pension strategies do non affect a prescribed income in retirement ; alternatively they prescribe degrees of part to the fund prior to retirement. The retirement obtained through a defined-contribution strategy depends upon the growing rate of investing and the pension rates available at the clip of retirement.

Defined-contribution pension strategy is a retirement program in which a fixed amount of income is invested individually every twelvemonth from the company for the benefit of their employees, to retreat these financess must be qualify with the program regulations because there are limitations to retreat before due clip and should be capable with the punishments. “ This is a program in which parts are specified ( voluntary depending on the strategy ) but the sum received by the employee on retirement is non fixed, alternatively it relates to how the financess in the program have been invested and the return on that investing. The employee usually has the duty of make up one’s minding how the parts are invested though investing picks may be limited by the existent pension fund supplier ” ( -2013 ) . Defined part pension strategy needs for employee to put the money into it, together with part from employer and provides to an employee accumulated amount on retirement as a pension income.

Defined-benefit programs gained popularity as a consequence of three primary factors ;

a ) defined-benefit have a helpful wont for employee to do them afford a better retirement benefit than that employee expects to obtain over other retirement strategies, particularly when employees live for a long period of clip after retirement.

B ) defined-benefit programs place the investing hazards related with market instability to the employer alternatively of the employee and

degree Celsiuss ) defined-benefit programs make the employer to be responsible for determination devising on investing alternatively of the employee. But these are an out dated ways of pension program in which an employer warrant a definite monthly benefit on retirement that a expression is predetermined based on the employee ‘s historical income, calling of service and age instead than trusting straight on single investing returns. “ It is defined in the sense that the expression for calculating the employer ‘s and employee ‘s parts is known in progress but benefit to be paid out is non known in progress ” ( Wikipedia 2013 ) .

“ The most common type of expression used is based on the employee ‘s terminal net incomes ( concluding wage ) ; under this expression, benefits are based on a per centum of mean net incomes during a specified figure of old ages at the terminal of a worker ‘s calling ” ( Wikipedia 2013 ) . For illustration, a pension may be set of 1/80th of concluding wage ( Lashkar-e-Taiba ‘s state ?100,000 ) for every twelvemonth worked for the employer, so if worker had been employed for 40 old ages ‘ service, the one-year pension benefit would be:

1/80 ten ?100,000 ten 40 = ?50,000.

“ Members of defined-benefit occupational pension strategies normally have to wait until the ‘normal retirement age ‘ of the strategy ( typically 60 or 65 ) before pulling the pension. If a member wishes to pull a pension earlier, there would normally be an actuarial decrease of around 5 % per twelvemonth for early retirement. For illustration retirement at 55, when the normal retirement age is 60 would imply a decrease in the one-year pension of approximately 25 % . Although there are actuarial decreases for retirement before the normal retirement age, there are non normally actuarial sweetenings for retirement after the normal retirement age ” . Keith Redhead ( 2008 ) .

“ Over the past 20 old ages, there has been a important displacement in retirement program schemes from the traditional defined-benefit program to the more modern-day defined-contribution program ; as a consequence of this alteration, the primary duty for fixing for retirement has been removed from employer program patrons and placed upon employees ” ( investopedia 2010 ) . Switching investing and lastingness hazards to employees, it may besides switch pension costs to employees and off from employers. The switch from Defined-Benefit to Defined-Contribution may take to the undermentioned factors:

“ Defined-benefit pensions are highly expensive on the employer which is why most companies are switched to a defined part program alternatively ; the biggest hazard with holding a non-government defined benefit program is that there is the possibility of the pension non being funded decently ; this strategy merely let a part of the pension to be transferred to a partner if the beneficiary base on ballss away whereas an RRSP is more flexible where all assets can be transferred ” ( milliondollarjourney 2009 ) . “ The demand and supply factors lending to the displacement from Defined-Benefit to Defined-Contribution program utilizing informations on pension coverage for 40 industries, many of the factors they examine and find to be statistically and economically of import to the displacement in pension coverage relate to additions in the mobility of workers between employers and in-and-out of the labour force. On the demand side, demographic tendency in the labour force may hold made the hazard of Defined benefit plans a more of import consideration for workers ” ( Aaronson and Coronado ( 2005 ) ) .

Many employees they have wont of altering working station over period of clip and this may take to lose some of their working benefits in footings of defined benefit strategy from old occupations to new occupations. “ Workers who anticipate altering occupations before retirement favour defined part programs because they suffer a portability loss when they change occupations with a defined benefit program that they do non endure in defined part programs. They suffer a portability loss when their benefits at retirement are based on their nominal net incomes at occupation alteration is eroded by rising prices that occurs between that day of the month and the day of the month of first benefit reception ” . John A. Turner ( 2008 ) .

By and large, adult females take a big figure of populations worldwide compared to work forces ; even in working environment adult females have big figure of enlisting even if their working morality is low in footings of duty and convincement from their properties. Aaronson and Coronado ( 2005 ) accent that, “ The greater Numberss of adult females in the labour force may be a factor in the decreased demand for defined benefit programs, adult females may hold less fond regard to a peculiar employer than work forces because they have greater duty for care-giving, besides they are more likely to be influenced by occupation alterations of their hubby than the contrary because they tend to hold lower wages than their hubby, though the inclination is worsening. Furthermore, the addition in the per centum of the work force that is double earner households may cut down the occupation fond regard to a peculiar employer for both work forces and adult females ” .

The maximal apprehensible cause of hazard to an employee in the Defined-Contribution program is the investing public presentation of the fund. Though, this cause of uncertainness can be controlled by the periodic parts that could be used to purchase deferred rentes which could do retirement income watercourses same as those delivered by Defined-Contribution programs. Otherwise, it is possible for the program to take an investing attack with low accommodation rates of existent returns. “ There are nevertheless no strong a priori grounds to believe that most persons would take to put accumulated Defined-Contribution financess in the lowest hazard plus. Defined-Contribution programs typically offer sufficient flexibleness to choose a risk-return scheme suited to the employee ‘s single penchants and fortunes. In concept, Defined-Benefit plans force person to roll up the pension part of retirement salvaging in the signifier of deferred life rentes and therefore restrict the risk-return pick ” . Zvi Bodie at EL ( 1998 ) .

“ A defined part pension program has a fixed part normally based as a per centum of the employee ‘s salary the benefit is dependent on how the investing performs with no warrants as to how much income you will have during retirement ” ( milliondollarjourney 2009 ) . “ A defined-contribution program has the benefit of entire control over the money/portfolio, the investor can take assorted financess and plus allotment within the program ; the strategy watches your money/portfolio grow, what you see is what you get and it control over your money and investings within the program ” ( milliondollarjourney 2009 ) . On other manus, the retirement income is wholly dependent on how the investings performs over the vested period so even the employee who has no interested in fundss demands to be involved with the investings. “ However, grounds indicates that many people struggle to understand and cover with the picks they face when salvaging for retirement. This is consistent with the rules of behavioural economic sciences, which suggest persons frequently do non do determinations in the rational, intelligent, and indifferent mode assumed by standard ” . Alistair Byrne ( 2007 ) .


In peculiar the original belief was that, defined- part programs would automatically rule defined- benefit programs because of the flexibleness of defined- part program design. This should be guessed that, anything that could be accomplished with a defined- benefit program could be duplicated in a skilfully created defined- part program. Defined part is really discernible since it is ever wholly funded and the employer usually has no fiscal duty other than to do periodic payments into the program in relation to a defined benefit program, the accounting intervention is really simple since the payment to defined part program are treated as any other concern disbursals. So this program provides relaxation to employees cognizing that even they traveling to alter their occupation from one topographic point to another the benefit is at that place every bit long as part is made.

Even though, an employee does non hold a pick whether to fall in up in a defined benefit program or a defined part program, it is normally depending on the company ‘s policy ; defined-contribution programs are going more common as they are much less hazard to the company and perchance to the employee every bit good.


Aaronson, Stephanie and Coronado, Julia. “ Are Firms or Workers Behind the Switch Away from Defined Benefit Pension Plans? ” Federal Reserve Board, Finance and Economics Discussion Series, February 2005.

Diamond, Peter, and James Mirrlees ( 1985 ) . Insurance facets of pension. In Pensions, Labor and Individual pick, edited by David Wise. Chicago: University of Chicago Press.

John A. Turner and Gerard Hughes ( April 2008 ) , A pension Policy Consultant and Visiting Professor, School of Business, Trinity College Dublin. “ Large Declines in Defined Benefit Plans are non Inevitable ” . The Pension Institute Cass Business School-City University 106 Bunhill Row London.

Personal Finance and Investments Book, “ A Behavioral Finance Perspective ” By Keith Redhead ( 2008 ) .

Zvi Bodie, Alan J. Marcus, and Bobert C. Merton ( 1988 ) , “ Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoff? ” University of Chicago Press. ISBN: 0-226-06285-6.

hypertext transfer protocol: // “ Defined Benefit Pension V Defined Contribution Pension ” by Frugal Trader. January 25, 2013.

hypertext transfer protocol: // The “ Defined-benefit Plan ‘s Many Problem ” . January 30, 2013.

hypertext transfer protocol: // “ Defined Benefit Plan ” . February 2, 2013.

hypertext transfer protocol: // term=defined-contribution-pension-plan “ Defined-Contribution Pension Plan ” The Financial Times LTD. February 5, 2013.


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