# Defined Benefit vs Defined Contribution



## bawaugh (18 May 2009)

My employer wants to make staff make contributions to the company defined benefit fund, which is currently in deficit. I already contribute 10% of my wages to a PRSA and do not want to contribute funds to the company scheme. The company does offer 5% of ones wages to a PRSA. Should I go with the DB scheme or go with a DC scheme?

I do not plan to work for this company for the rest of my career and would prefer not to have a pay cut.

Thanks


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## StevieC (19 May 2009)

*Re: Defined benifit vs Defined Contribution*

Defined Benefit pensions are vastly superior to Defined Contribution schemes, provided the scheme stays in operation. If you have doubts that your employer will be around long term to fund the DB scheme then you could be left with a shortfall in benefits however.

Main question I would ask myself is will my employer be able to fund the DB scheme long term, if you feel they will then contribute to the DB scheme. If you have doubts then put the money in the PRSA, its potentially not worth as much as the DB scheme but the benefits will be ringfenced in your own name.


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## bawaugh (21 May 2009)

*Re: Defined benifit vs Defined Contribution*

While I doubt my employer will go bust, their plan would force me to reduce my current pension contributions so I can stay under the 15% limit for my age category (hence why I'm contributing 10% and their 5% equivalent to the pension fund). In addition their plan is to add further company cash to the fund hence I may not be able to take advantage of any Government tax breaks for my pension. I believe they are contributing around 5%

In addition I do not intend to spend the rest of my career with them, (only the next few years) and may leave Ireland at some stage in my life to return to New Zealand and it would be a pain to have the cash left over here (they will not allow transfers).


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## StevieC (22 May 2009)

*Re: Defined benifit vs Defined Contribution*

While you are right that having to contribute to the company pension reduces the amount you can put in your PRSA, the employer contributions in no way affect your own contribution limits based on age. For example if they ask you to put 5% in your company pension you can still put 10% in your PRSA and be within your 15% limit based on age. Them making additional cash injections to their scheme in no way affects your own personal contribution limits.

Since you do not fear the company going bust, I'd repeat my advice about leaving the pension benefits in the defined benefit scheme. Sure it may be cleaner to move the benefits back to New Zealand with you down the road, but the transfer value you get will probably never be as good as the guarantee of a percentage of final salary. I'd leave the pension paid up with them unless things change between now and when you leave the company.


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## FTB1 (22 May 2009)

*Re: Defined benifit vs Defined Contribution*



StevieC said:


> Defined Benefit pensions are vastly superior to Defined Contribution schemes, provided the scheme stays in operation. If you have doubts that your employer will be around long term to fund the DB scheme then you could be left with a shortfall in benefits however.




What if its an integrated DB scheme with no escalation or attaching Spouses pension (or the OP is single and likely to remain that way) and the DC contribution rates are based on actual salary?

What if the OP would prefer to have an ARF in retirement instead of a "steady" pension?

What if the OP fears that his employer may fund that plan but not at the rate required by the Pensions Board and therefore his pension may be scaled back under Section 50 or 50(a) of the Pensions Act without his consent??

My advise to the OP is to get some professional advice or educate yourself properly on pensions matters and make an informed choice. You have given way too little detail for a proper answer here and to be honest for a proper answer you'd probably need to give more detail then you'd be willing to post on the internet.


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## StevieC (22 May 2009)

*Re: Defined benifit vs Defined Contribution*



FTB1 said:


> What if its an integrated DB scheme with no escalation or attaching Spouses pension (or the OP is single and likely to remain that way) and the DC contribution rates are based on actual salary?
> 
> What if the OP would prefer to have an ARF in retirement instead of a "steady" pension?
> 
> ...


 
What DC rates? OP talks about his own arrangement, a PRSA. For what the OP has put in, the DB arrangement will give a better benefit than a transfer value at this stage regardless of indexation or spouses pensions.
No DC scheme will ever match a DB one as no employer will match the contributions in a DC scheme needed to fund for the DB benefits, its part of the reason DC pensions came into being as employers wanted to cut costs and know for certain what their costs would be going forward. With Life expectancy rising due to advances in health care, annuities will only increase in price in the future making the DB pension even more desirable.

ARF's arent totally applicable to this case as OP has indicated they may return to New Zealand before retirement. Regardless I would not advise anyone to move a transfer value from a DB arrangement into a pension product that will allow an ARF unless they fear the DB pension wont have enough funding for their pension benefits.

The OP has said they are not worried about the company, if they were I recommended moving the fund.

I agree the OP should seek advice at the time he leaves his company but there is nothing wrong with getting some independent views here to point them in the right direction.


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## FTB1 (8 Jun 2009)

*Re: Defined benifit vs Defined Contribution*



StevieC said:


> What DC rates? OP talks about his own arrangement, a PRSA.



Maybe I misread this but does he not refer to a 5% employer contribution rate here?



			
				OP said:
			
		

> The company does offer 5% of ones wages to a PRSA.





StevieC said:


> For what the OP has put in, the DB arrangement will give a better benefit than a transfer value at this stage regardless of indexation or spouses pensions.
> *No DC scheme will ever match a DB one as no employer will match the contributions in a DC scheme needed to fund for the DB benefits, *its part of the reason DC pensions came into being as employers wanted to cut costs and know for certain what their costs would be going forward. With Life expectancy rising due to advances in health care, annuities will only increase in price in the future making the DB pension even more desirable.



I'm afraid I must disagree with the above statement. I can think of 10 examples I've encountered off the top of my head. 
There are some very generous DC schemes out there that even allowing for a negative real return versus salary inflation would be expected to produce higher benefits on retirement then the Employers DB plan and with no added risk of your benefits being cut unilaterally.

The prospect of section 50A reductions in DB plan benefits following consultations with DB plan members when employers run into difficulties sticking to agreed funding proposals means you seriously have to weigh up the risks of reaching retirement age with an unreduced accrued pension from a DB plan even where the employer doesn't go "bust".

Your advice in this area is sweeping and in many real cases I've encountered simply wrong.  




StevieC said:


> ARF's arent totally applicable to this case as OP has indicated they may return to New Zealand before retirement. Regardless I would not advise anyone to move a transfer value from a DB arrangement into a pension product that will allow an ARF unless they fear the DB pension wont have enough funding for their pension benefits.



I wasn't hanging my hat on that one point it's just part of the picture. Your advice was very one sided in my view and I was illustrating just some of the other variables which should be considered.






StevieC said:


> The OP has said they are not worried about the company, if they were I recommended moving the fund.
> 
> I agree the OP should seek advice at the time he leaves his company but there is nothing wrong with getting some independent views here to point them in the right direction.



Fair enough but to me you just seemed to be saying DC bad, DB good. It's nowhere near that simple. Also I didn't mention anything about moving assets in relation to accrued benefits. What the OP does in relation to future benefits and accrued rights are two separate questions and should be looked at seperately


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## StevieC (9 Jun 2009)

*Re: Defined benifit vs Defined Contribution*

DB good DC bad, is a sweeping statement I agree but also there is also truth to it.

Why have employers been moving away from DB schemes to DC schemes even before the liabilities of the pension were required to be shown on their balance sheet? Reason is that DB arrangements are more expensive for the employer. Why are they more expensive? Because they offer better pensions.

DB pensions are the rolls royce of pension provision. DC pensions are the ford focus, gets you from A to B but in no way lets you retire in style. Sure some DC pensions are better than others in way of employer contributions but all the investment risk is on the employee.

A DC arrangement will only provide you benefits that your individual pot will pay for. Arguing that a DC funds expected returns are better than a DB ones is like saying a bird in the bush is better than one in the hand. There is no guarantee on future returns on a DC pension. Once the DB scheme stays solvent, there are very real guarantees on its returns, ie a guaranteed pension based on service and final salary and not a kiss and a promise dependent on future market conditions which no one can predict.

If I had to take a gamble on an employer still being around vs market conditions in the future, sorry but the employer wins every time once I feel they are a relatively secure company. Remember that you are not just dependent on fund performance but also on annuity rates. As life expectancy goes up every 10 years on average, annuity rates are continually adjusted to reflect that insurance companies have to pay out annuities longer.

I take the point that employers can ask for further contributions from existing employees in DB arrangements but they cant ask this from ex-employees with deferred pensions so there is no risk that they will be asked to pay more for their deferred benefit. The real risk is a shortfall in the fund and the employer been unable to meet the funding requirements of the scheme. Once you are happy that an employer long term will be able to meet the funding requirements then I stand over my advice to leave the deferred pension where it is. 

Remember also that going forward many companies that traditionally offered DB pensions have closed these schemes to new members and have set up DC/PRSA arrangments for newer/future employees. This means that DB fund shortfalls will decrease over time as companies get funding back on track. 

One final point, transfer values on DB schemes take into account the funding provision of the scheme at present when actuaries make their calculations. The fact that most DB pensions are in rag order funding wise due to markets slumping means taking a transfer value now penalises you as you are taking it at a bad time in relation to the schemes funding.


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## FTB1 (9 Jun 2009)

*Re: Defined benifit vs Defined Contribution*

Hey Stevie,

I'm not really looking to get into a debate on the merits of unspecified pension plans. Plus the OP doesn't seem to be around so really this debate is not even helping anyone unfortunately. 

My basic premise is that a DB plan is only as good as the benefits promised (not guaranteed. No DB plan is guaranteed despite what you may have read). If someone promises me 1/100th of pensionable salary for every years service requiring an employee contribution of 5%  versus a 10% dc contribution rate from my employer I know which one I would take. Each to their own personal financial circumstances and views I guess. 

You seem to have some strong opinions based on your own experiences but I don't think they should be misconstrued as advice hence my interjection into this thread. Anyone faced with DC versus DB choices should look a little deeper then the scheme title and the "type" of benefits promised. 

Regards

FTB


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## StevieC (9 Jun 2009)

*Re: Defined benifit vs Defined Contribution*

Hi FTB1

I'm not looking for an argument either, we just have different opinions which is what this forum is all about. 

Its not a case of reading about DB schemes, I used to manage the DB administration team for one of the major insurance companies (the second largest supplier of DB pensions in the market) for a number of years. I have seen all the pro's and con's of DB vs DC and know from experience that transfer values taken from DB schemes invariably do worse than if they had been left as deferred pensions. (I still add the proviso that the funding position is ok and that the company can meet its pension liabilities long term)

The majority of schemes are done on 1/60th with some done on a 1/80th basis (even on 40/80ths, I dont see any DC scheme with 15% contribution ever making a pension of half final salary, unless there is spectacular investment performance!). I have never seen a 1/100th basis for defined benefit, if such exist then you raise a valid point. 

I agree the OP should sit down with a financial advisor and tell the advisor all the relevant facts but in general I stand over my assertion that DB is better than DC in if not all cases then 99% of them once the funding requirements are not an issue.

Regards

Stephen


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