Defined contribution plan is widely used by today’s society, Poterba (2007) defines it as superannuation plans in which the employer and/or employee pays a fixed contribution into the fund. These fixed contributions are then invested. Returns of these contribution back to the employee upon retirement is based on how well the invested contribution have performed in the financial market and how much of the returned benefit have accumulated. Therefore this is a certain risk of getting negative returns.
Define benefit superannuation plan however is different to defined contribution plan because the payments of the retiree is predetermined. The benefit plan is determined by a formula which reflects their years of service, age at retirement and level of remuneration. With this type of fund the employer is liable to pay further contribution if the fund is unable to pay the level of member’s benefits due. Defined benefit plan does not carry higher risks (Poterba, 2007)
Because people, chose to change job or the fact that an entity cannot assess employee’s longevity, it carries the risk of termination or defined benefit plan “freeze” This as Porterba et all (2007) state, effects the accrual value of retirement assets, and many ‘workers have higher actuarial present discounted value of benefits in defined benefit plan’. Employer’s payments have to be an estimate based on the final salary, earnings rates, and the probability of the employee staying with the company until the retirement. Not only does it depends on the entity’s ‘financial position and its performance, but also its ability to make good any shortfall in the fund’s assets’ (Samkin R, 2006) It is therefore underwriting the actuarial and investment risks that is associated with the plan. As a result of this, the recognition of the expense will not be the same as the entity’s estimated contribution due for the period.
Since the global financial crisis affected many economies around the world, investment showed... [continues]
Define benefit superannuation plan however is different to defined contribution plan because the payments of the retiree is predetermined. The benefit plan is determined by a formula which reflects their years of service, age at retirement and level of remuneration. With this type of fund the employer is liable to pay further contribution if the fund is unable to pay the level of member’s benefits due. Defined benefit plan does not carry higher risks (Poterba, 2007)
Because people, chose to change job or the fact that an entity cannot assess employee’s longevity, it carries the risk of termination or defined benefit plan “freeze” This as Porterba et all (2007) state, effects the accrual value of retirement assets, and many ‘workers have higher actuarial present discounted value of benefits in defined benefit plan’. Employer’s payments have to be an estimate based on the final salary, earnings rates, and the probability of the employee staying with the company until the retirement. Not only does it depends on the entity’s ‘financial position and its performance, but also its ability to make good any shortfall in the fund’s assets’ (Samkin R, 2006) It is therefore underwriting the actuarial and investment risks that is associated with the plan. As a result of this, the recognition of the expense will not be the same as the entity’s estimated contribution due for the period.
Since the global financial crisis affected many economies around the world, investment showed... [continues]
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