In response to the worst economic crisis since the Great Depression, defined benefit plans across the globe have reduced the rate of future benefit accruals to adjust their liabilities to their assets. In spite of these unprecedented adjustments, defined benefit pension plans continue to be the gold standard of retirement security.

Benefits Protected

As demonstrated by the Central Pension Fund’s recent reduction in the rate of future benefit accrual, no matter how severe the economic crisis, defined benefit plans have the ability to absorb losses without endangering a penny of the benefits that have been earned by participants, or are being paid to retirees and their beneficiaries.

Benefits Definitely Determinable

While the rate of future benefit accruals may be adjusted (up or down) in defined benefit plans, the benefit earned to date and payable at retirement is always definitely determinable. This means that on any day during a participant’s working career, he or she is always able to determine exactly the amount of retirement benefit they will be entitled to at retirement.

Benefits for Life

The most enviable feature of defined benefit plans, that distinguish them from all others, is that they provide a monthly benefit for life. It is this feature that provides the greatest peace of mind to retirees and their beneficiaries.

No matter how large or small the benefit, participants know that they can count on receiving it every month for their lifetime, and that of their spouse if they so choose. This provides one certain source of income that, together with a monthly Social Security benefit, can be critical to budgeting a dignified retirement.

It is impossible to put a value on the peace of mind that is provided when retirees do not have to worry about whether the stock market is devouring their retirement savings, or whether they will outlive the savings they have accumulated.

Years of Service Add Up

Entirely separate from the rate at which benefits accrue in any particular year, in defined benefit plans each additional year of participation has additional benefit significance. This is because the number of years of participation determines eligibility for both the retirement and ancillary benefits typically provided by defined benefit plans.

For instance, the Central Pension Fund requires 5 years of service to qualify for a Normal Retirement benefit at age 65; 10 years for an Early Retirement benefit as early as age 55; 15 years for a Disability benefit at any age; and 25 years for an unreduced Normal Retirement benefit at age 62.

Accordingly, regardless of the rate of benefit accrual in effect in any given year, continued participation adds important years of service to qualify for the range of benefits offered by defined benefit plans.

Conclusion

To paraphrase a Winston Churchill comment on democracy: defined benefit pension plans may not be perfect, but they are better than all the others that have been tried.

The only current alternative to defined benefit plans are 401(k) plans, which offer none of the features of defined benefit plans:

• 401(k) benefits are never protected.
• 401(k) benefits are never definitely determinable.
• 401(k) benefits are not payable for life.
• 401(k) years of service don’t qualify participants for either normal retirement, or ancillary benefits.

The current economic crisis has demonstrated the ability of defined benefit plans to adjust to even the greatest adversity. As the United States, Canada and the world economies recover --- as they will --- so will defined benefit plans recover lost assets, restore benefit accrual rates, and continue to provide the most secure form of retirement income ever created.