A pension plan is a promise by a pension plan sponsor to a plan member to
provide a pension upon retirement.
The sponsor may be a company, an employer, a union or a jointly trusteed
plan where both management and unions in an industry appoint trustees to a board
which manages the plan. This promise is legally stated in the "pension plan
document" which states the provisions for the plan.
Pension plans are regulated by governments. In Canada, this occurs at both
the federal and provincial level. The federal legislation covers federally
incorporated and regulated companies such as airlines. Each province has its own
legislation and agency, such as the Ontario Pension Board.
A trustee is appointed to hold the assets in trust for the benefit of the
plan members. Usually the trustee is also the custodian, which holds the plan
investments. Pension plans usually hire an outside investment manager to invest
the plan assets. The sponsor may also appoint an "investment consultant"
to advise on investment issues and help select and assess the performance of
investment managers.
More About Pension Plans...
Defined benefit pension plans promise a pension based on a defined formula.
This could be a formula based on years of service, hours worked or some other
predetermined calculation. A defined contribution pension plan bases the
pension on the earnings of the invested contributions. Whatever these
contributions earn over the life of the plan are used to buy a retirement income
via a purchased annuity.
In the case of a defined benefit plan, sponsors are legally required to set
aside enough money to cover the pension promise that has been made. Legislation
requires that an Actuary perform actuarial valuations at least every three years
to establish the solvency of the plan. The valuation calculates the present
value of the assets and liabilities of a plan, according to specified
demographic and return assumptions.
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