Defined Benefit Plan Advantage
HOOPP is a defined benefit plan... and proud of it.
We firmly believe that the DB pension model offers a superior benefit and higher level of security than defined contribution (DC) pension plans. The table below explains why. It provides a simple summary of the two plan types and highlights what we believe to be the key advantages of the DB model.
| DB | DC | The DB Advantage | |
|---|---|---|---|
| Philosophy | To reward members for long service with a lifetime retirement income. | To help members accumulate retirement savings during their active career. | The security of income rather than savings. |
| Contributions | Typically, member and employer contribute a set percentage of the member's salary. Funds are deposited in a pension fund for the benefit of all plan members. | Typically, member and employer contribute a set percentage of the member's salary. Funds are deposited in a personal account set up in the member's name. | In most DB plans, employers shoulder the investment risk. Under a DC plan, members take on all the investment risk. |
| Investment Decisions | Professional money managers make the investment decisions based on strict guidelines established for the plan as a whole. | Members have to decide how their money is invested, usually based on a range of available investment options. | With a DB plan, members don't have to worry about making investment decisions or tracking investments because a highly qualified investment professional is doing it for them. |
| Income at retirement | Retirement income is a percentage of the member's pre-retirement earnings - so the more service the member has, the bigger that percentage will be. Once members start receiving their pension, they receive it for life. | The money in the member's account is used to buy a lifetime annuity (an income stream). The size of that income will depend on various factors such as how much the member has contributed, the success of the investment strategy, and interest rates when the member buys an annuity. | With a DB plan, members can estimate, in advance, what their pension will be. Benefits are pre-defined - members know what they are going to receive. |
| Ancillary benefits | Many DB plans, offer ancillary benefits such as:
|
At retirement, members may be able to buy a lifetime annuity that includes some ancillary benefits such as partial inflation protection - but these extras tend to be pretty expensive, which reduces the amount they'll have available to provide an income stream. | With a DB plan, the ancillary benefits are built in and members don't have to worry about the additional cost of shopping around for an annuity that includes them. |
