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 by providing them with a clearly defined retirement benefit based on an established formula. | To help members accumulate retirement savings during their active careers. | The DB benefit offers the security of a formula-based pension. |
| Contributions | Typically, you and your employer contribute a set percentage of your salary. Funds are deposited in a pension fund for the benefit of all plan members. |
Typically, you and your employer contribute a set percentage of your salary. Funds are deposited in a personal account set up in your name. |
With a DB plan, all contributions are pooled in one fund, so the investment risk is shared. Under a DC plan, the member assumes the full investment risk. |
| Investment decisions | Investment decisions are made by professional money managers, based on stringent guidelines established for the plan as a whole. | The individual member must decide how the money is invested, based on a range of available investment options. | With a DB plan, you don’t have to worry about making investment decisions or tracking investments. The investment decisions are made by highly qualified investment professionals. |
| Income at retirement | Your retirement income is based on a formula that typically takes into account your earnings history and length of service in the plan. Once you start receiving a pension, you receive it for life. Compared to a defined contribution plan, HOOPP has an extremely low management expense ratio. |
The money in your 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 has been contributed, the success of your investment strategy, and interest rates when you buy your annuity. | With a DB plan, you get the peace of mind knowing your pension will be there… when you need it. Because your DB pension is based on a formula, you can estimate, in advance, what your pension will be. |
| Ancillary benefits | Many DB plans, such as HOOPP, offer ancillary benefits, such as: • inflation protection • enhanced early retirement benefits • enhanced survivor benefits • disability benefits |
At retirement, you may be able to buy a lifetime annuity that includes some ancillary benefits, such as partial inflation protection. However, these extras tend to be quite expensive, which will reduce the amount you have available to provide an income stream. | With a DB plan, the ancillary benefits are built in. You don’t have to shop around for an annuity that includes them. |
Only about 40 per cent of Canadian employees belong to employer-sponsored pension plans – and an even smaller percentage belong to DB plans.
