What’s the difference between a defined benefit and defined contribution pension plan?

financialpost.com:

By Julie Cazzin with Allan Norman

Q: I know that a lot of workers who change jobs go from defined-benefit (DB) pension plans to defined-contribution (DC) pension plans at their place of work. How can I figure out how much money I’ll really end up with in retirement? And what are the pros and cons of each of these plans?

FP Answers: No question, Antonio, changing jobs and switching between defined-benefit and defined-contribution plans make it challenging to determine future retirement income. Both plans are good, but quite different, and each plan has its own variations. Knowing the pros and cons of each, and how to use them in conjunction with each other, will help better prepare you for retirement.

The main differences between the plans relate to investment management, control and retirement-income delivery. DB investment management is done without any input from pension members. As a result, it is the pension sponsor, the employer, that assumes all the investment risk.

At retirement, the pension sponsor is required to pay pensioners a fixed income for life, based on a published formula, no matter the investment performance. There is little to no investment risk or longevity risk (outliving your money) to the pensioner, assuming the pension sponsor remains solvent throughout a pensioner’s life.

With a DC plan, the employee makes investment decisions based on a fixed set of investment options within the plan. This is very similar to registered retirement savings plan (RRSP) investing, but with less investment choice. A pensioner’s retirement income is based on expected life expectancy and investment performance leading up to and in retirement.

If you have both a DB and a DC plan, the combination may impact your DC