Advisories
Advisory 19
DEFINED BENEFITS PENSION PLANS
A Defined Benefits Pension Plan is a retirement
plan that stipulates that each participant will
receive a set payment after a predetermined number
of years of service. Contribution to the plan may
be by employee only, employer only, or both.
Because there is a stipulated payment that each
employee will receive on retirement, there are certain
risks associated with these plans. In an era of
low investment returns, long term employees, changes
to eligibility age of retirement etc., there is
a potential for a funding shortfall to accumulate
in these plans.
Over the past couple of years, we have seen credit
unions in Nova Scotia introducing Defined Benefits
Pension Plans when most corporations are looking
at going to a Defined Contribution Plan. A Defined
Contribution Plan is a retirement plan wherein a
certain amount or percentage of money is set aside
each year by employees and the company for the benefit
of the employee. There are restrictions as to when
and how you can withdraw these funds without penalties.
There is no way to know how much the plan will ultimately
give the employee upon retiring. The amount contributed
is fixed, but the benefit is not.
Which plan a credit union wishes to offer its employees
is completely a Board decision and we are not making
any judgments on the acceptability of these pension
arrangements for employees. What we are concerned
with is that there needs to be full financial disclosure
for Defined Benefit Plans so a Board is fully informed
of all the advantages, disadvantages and potential
impact on income.
In this regard, we consider it a "best practice"
that Board of Directors utilize the services of
a qualified pension consultant when considering
either moving to, or changing the terms and conditions
of a Defined Benefits Pension Plan. It is also encouraged
that prior to any changes in pension arrangements
that you discuss the proposal with Credit Union
Central of Nova Scotia and/or CUDIC.
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