benefit payment under a DB scheme

Hi,

Could you please answer my 2 questions about DB scheme?

In a DC scheme, i know that at retirement all money in the pension fund will be used to buy an annuity. The benefit payment will be paid by the annuity seller.


In a DB scheme,

Question1:
Will the benefit payment be paid directly from the pension fund in the DB scheme?

Question2:
Suppose a member is still alive at his aged 100 and all money he accumulated in the DB pension fund is drawn.
Will the employer inject additional money to his DB pension fund?

Thank you!

 

In DC scheme, all contributions are set aside in a notional account for each member and that provides his benefits.

In a DB scheme, the rules sets out how the benefits are calculated, which often is based on final salary rather than contribution balance. So when a person draws a benefit, the rules say how to calculate the amount. The scheme then decides whether to pay it themselves (typical) or to buy an annuity. The annutiy here will be for a set pension (as opposed to in DC where it is what you get for a set price)

DB schemes don't usually set aside money for individual members. So basically, they put contributions in and take benefits out. If they start to run low (determined by actuarial valuation) the sponsor needs to contribute more in aggregate.

 

Hi,

Thank you for your reply.

"DB schemes don't usually set aside money for individual members."

My friend told me that I was told that each member's asset will be valued seperately.
If so, the 100 yrs old man asset will be negative and employer need to inject money.
Am I right?

Is my friend right?

 

Hi

If DB doesn't usually set aside money, then why would either the employer or the member contributes or even both contribute? As it's the scheme rule that specifies the benefit? Or this contribution actually is a means of funding?

I just don't see the point of contribution here under DB whereas the function of contribution is clear under DC. Thanks very much if anyone can help.

 

The benefits have to be funded somehow, so the sponsor (and sometimes members) pay contributions.

The point below is that DB contributions go into the big pool to meet all benefits. Compare this to DC when the sponsor's contributions go into individual member's accounts.

DB - contribute as needed to fund all benefits.
DC - contribute defined amount to individual member's accounts.

 

Thanks. I see your point.

But what's relationship between member's contribution and their final defined benefit under DB? If it needs to be funded anyway like you said, then it's just a token contribution then as scheme rule defines the benefit ?
Under DC, it's clear benefit amounts directly depend on the contribution amounts and the investment return earned in respect of that member.

 

Some benefits might be defined in terms of the member's contributions, eg on death in service you might a refund. The rationale is that you get back what you paid personally and didn't lose out by (being forced) to contribute.

Major benefits ( the pension itself) may not be at all related to contributions paid.
But it's not unreasonable to make members pay part of the cost. Why should employers (governments etc) pay the entire cost?

The member's contributions could be variable like sponsors, but it's more common to set a fixed rate.