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Responsibilities | Pension Plans
Information for Pension Plan Members
What is a Pension Plan?
A pension plan is a plan scheme or arrangement organized and administered to provide pensions for employees and former employees, and under which the employer is required to make contributions on behalf of the members.
A pension plan is established by an employer or collective bargaining agreement to provide employees with a pension when they retire. Pension benefits are funded by regular contributions to the plan by the employer, and in many cases by the employees as well, and by investment earnings on those contributions.
There are two main types of pension plans, defined benefit plans and defined contribution plans.
A defined benefit plan sets out the pension to be provided by using a formula based on years of service, employee earnings, and other factors. A defined benefit plan may be a flat benefit plan, or a unit benefit plan.
A flat benefit plan provides a fixed benefit, usually a dollar amount of monthly pension, which is typically based on years of service with a single employer, or with participating employers under a multi-employer plan.
A unit benefit plan provides for a pension benefit expressed as a percentage of earnings for each year of service with the employer (e.g. 2% per year). A unit benefit plan can be any of the following:
- a final earnings plan, in which the benefit formula uses your earnings at the time of retirement;
- a final average earnings plan, in which the benefit formula uses your average earnings for a specified number of years immediately prior to retirement;
- a highest or best average earnings plan, in which the benefit formula uses your highest average earnings for a specified number of years (e.g. best 5 years) over the entire period of membership in the plan;
- a career average plan, in which the pension is based on your average earnings over your entire period of membership in the plan.
A defined contribution plan, sometimes called a money purchase plan, provides for regular, fixed contributions to the plan, but does not define the resulting pension. Contributions are usually a fixed percentage of your earnings, i.e. a number of dollars per hour worked, or less commonly, a fixed dollar amount. The pension you ultimately receive will depend on the type of annuity that you choose at retirement, using the accumulated contributions in the plan, and the interest earned on those contributions.
A pension plan may be contributory or non-contributory . In a contributory plan, both you and your employer are required to contribute to the plan. In a non-contributory plan, only your employer contributes.
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