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There are two main types of plans that have been offered as pension plans over the years: defined contribution and defined benefit plans. There are different benefits to each and different cost structures for the organization. Again, decisions around whether to offer a pension program and what type should be discussed with insurance and benefits professionals and your accountant. Many organizations have decided to no longer offer a pension plan and instead offer to contribute to or match employee contributions to either group or individual RRSPs.

Defined Benefit Plans

A defined benefit (DB) plan is a pension that pays a fixed annual amount to employees during their retirement. The contributions are based on a formula of what the participants' retirement benefits should be, usually based on income level and length of service. At retirement, regardless of investment fluctuations, the benefit as determined by the plan is payable.

This type of plan leaves the employer exposed to future funding requirements based on negative investment results of plan funds. There are many organizations with significantly underfunded DB plans, which have the potential to cause significant financial hardship in years to come. For this reason, it is becoming less common for employers to offer a DB plan. Many who currently offer DB plans are closing participation and offering an alternative plan to new employees.

Defined Contribution Plans

Under a defined contribution (DC) pension plan, the contributions to the plan are pre-determined, whereas the benefits are not. DC plans can be set up with employees either contributing or not contributing. Employers must contribute on behalf of employees as part of the structure of the plan. The provisions of the Canada Income Tax Act require employers to contribute at least 1% of the employees' salary in order for the plan to be recognized as a registered retirement plan.

The pension benefits that an employee will receive after retirement from a DC plan depend on a number of factors, like contribution amounts, number of years enrolled in the plan and the performance of the fund investments.

DC plans are surpassing defined benefit plans in popularity, as they provide more flexibility to the employer and defined costs in terms of planning and sustaining pension funding. As payments to DC plans are fixed, a company's monthly expenses are easier to calculate, allowing you to always know how much your contributions will be.

Group RRSPs

Group RRSPs feature an employer-arranged plan into which employees can make contributions through payroll deduction. The employee can decide how much they wish to contribute each year, and the employer deducts and submits it to the plan administrator. The contribution is then deposited into the employee's individual account and invested as specified. There are many providers of group RRSPs for employers to choose from. Some plans offer contribution-matching or pre-set contributions by the employer.

The big difference and benefit to employees whose employer offers a group plan versus individual-contribution RRSPs is that the employee realizes the tax savings associated with RRSP contributions immediately, instead of having to wait until they receive their tax refund. Group RRSP contributions are made on a pre-tax basis, so the amount of tax withheld by the employer is calculated after the group RRSP contribution is deducted from taxable income, thus providing an instant tax savings.

Other Programs

There are other programs available that are often offered only to senior management or executives, such as a deferred profit sharing plan, or DPSP. It is not overly common to find these plans in small and medium-sized companies. Retirement and pension plan providers can make available further details on this and the plans outlined above.