Pension Basics
Understanding Defined Benefit vs. Defined Contribution Pension Plans
A pension plan is an important financial asset that can play a significant role in members’ long-term financial security. Generally, pension plan members and/or their employers make contributions to a pool of funds that are invested and that, along with the earnings generated from those investments, will provide members with income for their retirement.
Determining the benefit amount a member will receive in retirement depends on the type of plan. There are two main types of pension plans: defined benefit and defined contribution.
Defined Benefit
In a defined benefit plan, members can expect a predictable monthly income in retirement. Contributions are made to a pool of invested funds which are set aside to pay for promised benefits.
Defined Contribution
In a defined contribution plan, the future benefit can vary because it is impacted by the returns earned by the investment pool. What is only defined in this type of plan is the amount of contributions that will be put into the plan.
OMERS offers a defined benefit plan to its members. In return for regular contributions that are matched by their employers, and the investment returns of the Planmembers can expect a secure and stable income for life.
To better understand the differences between a traditional defined benefit plan, defined contribution plan and the OMERS Defined Benefit Plan, please see the table below.
Traditional Defined Benefit (Single Employer Pension Plan) | |
|---|---|
Who contributes | Employers (but some plans also require member contributions) |
Contribution requirements | Employer contributions are dependent on the financial health of the plan and can change from year to year |
Who assumes investment risk to provide income in retirement | The employer |
Level of contributions affects the amount of benefits provided under the Plan | No |
Amount of retirement income | Predicable, based on a pension formula based on earnings and years of service |
Predictable monthly retirement paid for life | Yes |
Survivor benefits provided | Yes |
Participation reduces personal RRSP room | Yes |
The OMERS Plan (Jointly Sponsored Pension Plan, JSPP) | |
|---|---|
Who contributes | Contributions are made equally by members and employers |
Contribution requirements | Can change depending on the financial health of the Plan |
Who assumes investment risk to provide income in retirement | Members and employers |
Level of contributions affects the amount of benefits provided under the Plan | No |
Amount of retirement income | Predictable, based on a pension formula based on earnings and years of service |
Predictable monthly retirement paid for life | Yes |
Survivor benefits provided | Yes |
Participation reduces personal RRSP room | Yes |
Traditional Defined Contribution | |
|---|---|
Who contributes | Members contribute, with employers matching contributions |
Contribution requirements | Contributions are very stable as they are established and defined in advance |
Who assumes investment risk to provide income in retirement | The member |
Level of contributions affects the amount of benefits provided under the Plan | Yes |
Amount of retirement income | Unknown until the date of retirement |
Predictable monthly retirement paid for life | No |
Survivor benefits provided | No |
Participation reduces personal RRSP room | Yes |
Traditional Defined Benefit (Single Employer Pension Plan) | The OMERS Plan (Jointly Sponsored Pension Plan, JSPP) | Traditional Defined Contribution | |
|---|---|---|---|
Who contributes | Employers (but some plans also require member contributions) | Contributions are made equally by members and employers | Members contribute, with employers matching contributions |
Contribution requirements | Employer contributions are dependent on the financial health of the plan and can change from year to year | Can change depending on the financial health of the Plan | Contributions are very stable as they are established and defined in advance |
Who assumes investment risk to provide income in retirement | The employer | Members and employers | The member |
Level of contributions affects the amount of benefits provided under the Plan | No | No | Yes |
Amount of retirement income | Predicable, based on a pension formula based on earnings and years of service | Predictable, based on a pension formula based on earnings and years of service | Unknown until the date of retirement |
Predictable monthly retirement paid for life | Yes | Yes | No |
Survivor benefits provided | Yes | Yes | No |
Participation reduces personal RRSP room | Yes | Yes | Yes |
The OMERS Primary Plan is governed by the following legislation:
OMERS Act, 2006 | |
|---|---|
Regulated by the Financial Services Regulatory Authority of Ontario (FSRA) | Establishes that OMERS is jointly sponsored, governed and funded by members and employers |
Sets out terms and conditions for pension plans | Sets out the objects and powers of the Administration Corporation (AC) and the Sponsors Corporation (SC) |
Establishes minimum standards for funding and benefits | Establishes certain parameters for the OMERS Plans such as participation and contributions |
Notice and filing requirements for plan amendments | |
Standard of care for plan administrators | |
Establishes rules for investment of plan assets | |
Income Tax Act, Canada (ITA) | |
|---|---|
Regulated by the Financial Services Regulatory Authority of Ontario (FSRA) | Regulated by the Canada Revenue Agency (CRA) |
Sets out terms and conditions for pension plans | Establishes rules that are intended to establish a maximum on the type and amount of benefits that can be paid from a registered pension plan |
Establishes minimum standards for funding and benefits | Establishes maximum standards for funding (i.e., contribution limits) |
Notice and filing requirements for plan amendments | Establishes rules for investment of plan assets |
Standard of care for plan administrators | |
Establishes rules for investment of plan assets | |
Pension Benefits Act, Ontario (PBA) | OMERS Act, 2006 | Income Tax Act, Canada (ITA) |
|---|---|---|
Regulated by the Financial Services Regulatory Authority of Ontario (FSRA) | Establishes that OMERS is jointly sponsored, governed and funded by members and employers | Regulated by the Canada Revenue Agency (CRA) |
Sets out terms and conditions for pension plans | Sets out the objects and powers of the Administration Corporation (AC) and the Sponsors Corporation (SC) | Establishes rules that are intended to establish a maximum on the type and amount of benefits that can be paid from a registered pension plan |
Establishes minimum standards for funding and benefits | Establishes certain parameters for the OMERS Plans such as participation and contributions | Establishes maximum standards for funding (i.e., contribution limits) |
Notice and filing requirements for plan amendments | Establishes rules for investment of plan assets | |
Standard of care for plan administrators | ||
Establishes rules for investment of plan assets |