Columnist image
Dale Jackson

Personal Finance Columnist, Payback Time


A dramatic global shift is transferring pension risk from employers to employees.

According to a new survey from U.K.-based Pensions and Lifetime Savings Association, the skyrocketing cost of defined benefit pension plans are pushing the companies who offer them into defined contribution plans.

The survey found that only 10 per cent of defined benefit pensions were open to new members this year compared with 21 per cent last year. New membership in private sector defined pension plans was only open to four per cent of new members.    

That means corporations are transferring the risk of providing for older employees to the employees themselves. The trend accelerated in the wake of the 2008 global financial meltdown and we’ve seen it here this year in contract negotiations with auto and postal worker unions.

While defined contribution pensions put more control in the hands of the plan holder, their retirement savings are exposed to the whims of the markets. Here’s how defined benefit and defined contribution pensions work:           

Defined Benefit plan

  • Your employer promises to pay you a certain amount after you retire – a flat benefit or a percentage of your salary at retirement.
  • The amount depends on the number of years worked and your income. Some add cost of living increases to hedge against inflation.
  • The pension fund is held “in trust” by a financial institution that looks after how the money is invested.
  • The funding risks are carried by the employer. Low interest rates, low equity returns, longer life expectancy are their problems. You receive payouts for life no matter what happens on the markets.
  • On the downside, if your employer gets into trouble or goes bankrupt, it can affect the pension fund. Some of the pension may be protected.

Defined Contribution plan

  • The employer contributes a certain amount to your pension account each year based on your work income – usually between three and six per cent.
  • Each employee has their own separate pension account.
  • Employees often have the option to contribute as well.
  • Employees will likely be given options such as fee-friendly pension versions of mutual funds with varying risks, which you track on your own.
  • How much you get depends on how much is contributed, and how well your investments perform.
  • On the upside, if the company should go bankrupt or get into trouble, you face less risk since your money is already in your own personal account.