Defined Benefit And Defined Contribution In Pension Schemes Accounting Essay


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Pension is fund that is built during the working life of the employee and then used to secure the income after retirement. These funds can be operated by employer (occupational pension) who invests over time or alternatively employee can invest in a fund of their choice (private pension scheme). Both of these schemes generate income after retirement. The pension funds are operated in many countries. According to international financial service the UK pension fund is $1,464 billion, Germany had $268 billion and France had $164 billion.


...Middle of the Defined Benefit And Defined Contribution In Pension Schemes Accounting Essay...

In UK there is an upper limit to the level of income from a define benefit scheme where as there is no such upper limit to the level of income generated from define contribution scheme. Hence the economic conditions like inflation, cost of living etc will have less effect on the employees in defined contribution scheme. Employees have no control over the investment decisions in the defined benefit scheme and are only eligible for predetermined excess returns on the investment where as in defined contribution scheme employees have full control of their investment and eligible for receipt of all the returns on the investment. Define contribution scheme can be easily transferred between employers as employee changes his job this may involve some additional cost and hence the employee can continue making investment in his own pension fund.


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Although employers are prefering define benefit scheme now a days, certainly when looking back at the recent credit crunch andtroubled financial markets, it was not uncommon for defined benefit arrangements to be holding surpluses and/or to be taking contribution holidays This will not be possible under a defined contribution scheme where the employer is required to maintain the agreed level of contributions irrespective of how well the investments are performing. When employers try to compare the real overall cost of providing a typical defined benefit scheme with a typical defined contribution scheme, they usually forget that employers benefit from favorable investment returns with defined benefit schemes as many defined benefit arrangements actually cost a lot less when contribution reductions and contribution holidays are taken into account.


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