What’s the difference between a defined benefit and defined contribution pension plan?

You can save this article by registering for free here. Or sign-in if you have an account.

Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.

Article content

By Julie Cazzin with Allan Norman

What’s the difference between a defined benefit and defined contribution pension plan? Back to video

Q: I know that a lot of workers who change jobs go from defined-benefit (DB) pension plans to defined-contribution (DC) pension plans at their place of work. How can I figure out how much money I’ll really end up with in retirement? And what are the pros and cons of each of these plans? — Antonio FP Answers: No question, Antonio, changing jobs and switching between defined-benefit and defined-contribution plans make it challenging to determine future retirement income. Both plans are good, but quite different, and each plan has its own variations. Knowing the pros and cons of each, and how to use them in conjunction with each other, will help better prepare you for retirement.

• Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.
• Daily content from Financial Times, the world's leading global business publication.
• Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
• National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.
• Daily puzzles, including the New York Times Crossword.

Subscribe now to read the latest news in your city and across Canada.

• Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.
• Daily content from Financial Times, the world's leading global business publication.
• Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
• National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.
• Daily puzzles, including the New York Times Crossword.

Create an account or sign in to continue with your reading experience.

• Access articles from across Canada with one account.
• Share your thoughts and join the conversation in the comments.
• Enjoy additional articles per month.
• Get email updates from your favourite authors.

Sign In or Create an Account

If you are a Home delivery print subscriber, unlimited online access is included in your subscription. Activate your Online Access Now

The main differences between the plans relate to investment management, control and retirement-income delivery. DB investment management is done without any input from pension members. As a result, it is the pension sponsor, the employer, that assumes all the investment risk.

At retirement, the pension sponsor is required to pay pensioners a fixed income for life, based on a published formula, no matter the investment performance. There is little to no investment risk or longevity risk (outliving your money) to the pensioner, assuming the pension sponsor remains solvent throughout a pensioner’s life.

With a DC plan, the employee makes investment decisions based on a fixed set of investment options within the plan. This is very similar to registered retirement savings plan (RRSP) investing, but with less investment choice. A pensioner’s retirement income is based on expected life expectancy and investment performance leading up to and in retirement.

If you have both a DB and a DC plan, the combination may impact your DC plan asset allocation decisions. Some may consider their DB plan as the fixed-income portion of their portfolio and hold a higher-than-normal equity portion in their DC plan than if they only had a DC plan.

Get the latest headlines, breaking news and columns.